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Informe Retail PwC Profitable Growth: Driving the demand chain.

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Este estudio elaborado por PwC y la Grocery Manufacturers Association (GMA), recoge datos de benchmarking de 142 fabricantes y 67 minoristas de Estados Unidos, así como diez artículos sobre los retos …

Este estudio elaborado por PwC y la Grocery Manufacturers Association (GMA), recoge datos de benchmarking de 142 fabricantes y 67 minoristas de Estados Unidos, así como diez artículos sobre los retos y oportunidades en la cadena de demanda.

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  • 1. Grocery Manufacturers Association 2012 Financial Performance Report Profitable Growth: Driving the Demand ChainResults for the food,beverage, and consumerproducts industry
  • 2. Based in Washington, D.C., the Grocery Manufacturers Association is the voice of more than 300 leading food,beverage and consumer product companies that sustain and enhance the quality of life for hundreds of millionsof people in the United States and around the globe.Founded in 1908, GMA is an active, vocal advocate for its member companies and a trusted source ofinformation about the industry and the products consumers rely on and enjoy every day. The associationand its member companies are committed to meeting the needs of consumers through product innovation,responsible business practices and effective public policy solutions developed through a genuine partnershipwith policymakers and other stakeholders.In keeping with its founding principles, GMA helps its members produce safe products through a strongand ongoing commitment to scientific research, testing and evaluation and to providing consumers with theproducts, tools and information they need to achieve a healthy diet and an active lifestyle.The food, beverage and consumer packaged goods industry in the United States generates sales of $2.1 trillionannually, employs 14 million workers and contributes $1 trillion in added value to the economy every year.For more information, visit the GMA Web site at www.gmaonline.org.PwC US helps organizations and individuals create the value they’re looking for. We’re a member of thePwC network of firms with 169,000 people in more than 158 countries. We’re committed to delivering qualityin assurance, tax and advisory services. Tell us what matters to you and find out more by visiting us atwww.pwc.com/us.For more information about PwC’s Retail and Consumer Products Industry Practice,visit www.pwc.com/us/retailandconsumer© COPYRIGHT 2012 Grocery Manufacturers Association and PricewaterhouseCoopers LLP, a Delaware lim-ited liability partnership. All rights reserved. PwC refers to PricewaterhouseCoopers LLP, and may sometimesrefer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structurefor further details. Reproduction of the 2012 Financial Performance Report—Profitable Growth: Driving theDemand Chain in any form is prohibited except with the prior written permission of both Grocery Manufac-turers Association (GMA) and PricewaterhouseCoopers LLP (PwC). GMA and PwC do not guarantee theaccuracy, adequacy, completeness, or availability of any information and are not responsible for any errorsor omissions or for the results obtained from the use of such information. GMA and PwC GIVE NO EXPRESSOR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABIL-ITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE. In no event shall GMA or PwC be liable for anyindirect, special, or consequential damages in connection with any use of the 2012 Financial PerformanceReport—Profitable Growth: Driving the Demand Chain. LA 12-0215 PH/CPSolicitationPwC has exercised reasonable professional care and diligence in the collection, processing, and reporting ofthis information. However, the data used is from third-party sources and PwC has not independently verified,validated, or audited the data. PwC makes no representations or warranties with respect to the accuracy of theinformation, nor whether it is suitable for the purposes to which it is put by users. This document is for generalinformation purposes only, and should not be used as a substitute for consultation with professional advisors.
  • 3. ForewordThe Grocery Manufacturers Association (GMA) and company financial data, government statistics, analystPricewaterhouseCoopers (PwC) are pleased to present reports, and other published material. The manufacturingour 2012 Financial Performance Report and overview of analyses are based primarily on public information fromthe consumer packaged goods (CPG) industry. 142 manufacturers. We would especially like to express our appreciation to the following executives, who partici-Perhaps more than those in any other sector, CPG compa- pated in the interview process and whose insights appearnies constantly monitor the temperature of the consumer. throughout this report:Shoppers maintain some of their most intense productassociations with many of the brands covered in this Bert Alfonso, The Hershey Companyreport. And yet, that series of activities that sparks andmaintains consumer devotion to a product and a brand— Chris Davies, Diageoin this report we call it the “demand chain,” a term that’srecently entered the business lexicon—too often plays John Gehring, ConAgra Foodssecond fiddle to the adults in the room: purchasing, Don Mulligan, General Mills, Inc.operations, and, of course, the supply chain. Steve Robb, The Clorox CompanyGiven that US consumers have enjoyed another year ofsteady improvement in their purchasing power, we decided Bill Schumacher, Sunny Delight Beverages Companyto produce the content of our 2012 report with an eyetoward the demand chain. We think you’ll quickly see the Duane Still, The Coca-Cola Companydifference, given articles with titles like “Catching up toconsumers in the age of demand,” “Are your demand and Al Williams, Bush Brotherssupply chains in synch?” and “Is the time right to invest ina direct-to-consumer channel?” As in previous years, we In addition, we want to highlight the extraordinary contri-begin the report with an executive summary that includes butions of PwC team members Tamara Beresky, Christineour top-performing companies analysis and an economic Hoyte, and Kristin Krogstie, who guided the developmentoverview. The executive summary also includes a fuller and refinement of all aspects of this year’s report.description of the demand chain and how we view itsrightful place in the corporate architecture. We hope that you find the report insightful and useful. The GMA and PwC look forward to continuing ourWe’ve used a number of sources to compile our report: inter- dialogue with you around these strategies, topics, andviews with senior leadership of GMA members (including analyses.members of the GMA CFO Committee), publicly reportedJennifer Kaleda Susan McPartlinVice President, Industry Affairs US Leader, Retail & Consumer IndustryGrocery Manufacturers Association PwCJohn G. Maxwell Lisa Feigen DugalGlobal Leader, Retail & Consumer Industry North American Advisory Leader,PwC Retail & Consumer Industry PwC 2012 Financial Performance Report Profitable Growth: Driving the Demand Chain
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  • 5. Table of contents Executive summary: Keeping pace in a demand-driven world 3 Economic recovery remains vulnerable on all fronts 5 A top-performing company analysis 11 Getting on the global map 18 Section 1: Enabling the demand chain 22 Catching up to consumers in the age of demand 23 Are your demand and supply chains in synch? 29 Play-to-win innovations: Disrupting the demand chain 34 Section 2: New paths for the shopping journey 40 Getting smarter about digital engagement 41 Is the time right to invest in a direct-to-consumer channel? 50 Stirring up sustainability demand 56 Section 3: Pursuing growth overseas 60 Capitalizing on emerging market growth opportunities 61 Before expanding abroad, dig deeper into the tax implications 67 Financial performance metrics 71 Retailers and manufacturers 72 Overall CPG industry: manufacturers 74 Size-specific data: large, medium, and small manufacturers 77 Size-specific data: very large manufacturers 80 Sector comparison 83 Appendices 86 2012 Financial Performance Report1 Profitable Growth: Driving the Demand Chain 1
  • 6. 2
  • 7. Executive summary: Keeping pace in a demand-driven world With consumers firmly in control, CPG companies need to rethink their value propositionIn 1982, management consultant Keith Oliver was helping Meanwhile, at the other end of thea client to better align its typically excess inventory level value chain…with its sales goals. Oliver’s insight was to consider all theprocesses that went into stocking the company’s ware- Loosely defined, the demand chain refers to the part ofhouses as one “chain of supply” rather than as a group of the value chain that creates profitable growth by drivingsiloed activities executed by unrelated players.1 History numerous customer interactions with a company’s brandsdoesn’t tell us what happened with Oliver’s client, but the and products. Put another way by Sunny Delight CFOengagement helped birth the concept of the supply chain, Bill Schumacher, “The demand side consists of innova-and with it a new way of thinking about manufacturing. tion, marketing, and sales, and I would say the key is how these three activities are integrated to identify and exploitEver since, the supply chain concept has enjoyed enor- opportunities.”mous influence as companies around the world have metcustomer needs and delivered shareholder value by effi- No doubt, most CPG companies believe they are laser-ciently managing the logistics around sourcing, produc- focused on the consumer as never before, but the reality istion, and distribution; outsourcing non-core activities; and that most organizations’ strategic attention is still firmlymoving manufacturing to low-cost territories. At the core fixed on the supply chain: trying to cut costs in manufac-of all these innovations is supply chain management. turing and betting that legacy products can, against all evidence, be rebranded in new territories without a lot ofBut here’s a question: What if there had been a different investment in new research and development. A focus onparadigm used instead of focusing on chain of supply? the demand chain, conversely, provides major new oppor- tunities to realize brand promise and drive growth.What if, instead of approaching his client’s issue from theangle of changing the way supply was managed, Oliver The obvious links in a demand chain at a typical CPGhad decided to try and boost customer demand for his company might include front-end sales, marketing,client’s products? In other words, what if the demand chain customer service, and trade promotions. But a demandrather than the supply chain had been reimagined? Well, chain can also include brick-and-mortar retail partners,the reality is that he probably wouldn’t have gotten very websites and online retailers, social media sites wherefar. Back in 1982, the tools to connect with consumers, consumer products are debated and discussed, and logis-measure their association with a given brand, or track their tics partners who might manage the returns process orspending patterns were pretty meager—mostly advertising end-of-product-life recycling. In fact, a successful demandto communicate with consumers, and cash register data to chain can be understood as a collaboration betweenunderstand what their tastes and spending patterns were. manufacturers, retailers, and these other applicable part- ners to better identify and meet customer demand.Today, 30 years later, it’s still critical to get supply chainmanagement right. But in a flat world, incremental While supply chains have been engineered and re-engi-improvements extracted via a new shared service center neered to the hilt, the demand chain is a work in progress.or a relocated production facility are, generally, not going Companies are just starting to really notice that consumerto distinguish a company. Fortunately, though, compa- expectations and attitudes are changing radically, andnies in the consumer packaged goods (CPG) sector now that keeping pace is critical to their survival. In fact, inhave at their fingertips all the tools they need to kick the PwC’s 15th Annual Global CEO Survey (January 2012),tires on another driver of growth and profitability: the customer demand was the number-one reason given bydemand chain. both consumer companies (64% named this reason) and retailers (68%) for rethinking strategy.3 Executive summary
  • 8. Executive summary: Keeping pace in a demand-driven worldWith consumers firmly in control, CPG companies need to rethink theirvalue propositionBut companies need better tools to monitor and understand as why particular consumers frequently purchase ademand. To understand why, in the consumer’s mind, some product one year, ignore it the next, and then start upservices and products register as high-demand items and again in year three. Another article, “Are your demandothers lag as also-rans, companies must build more robust and supply chains in synch?” reminds us that a focus oncapabilities around digital commerce, ensuring the full the supply chain never goes out of style—it’s just thatintegration of Internet and mobile strategies with other consumer demand moves so fast, and consumers loveoperations and developing ever-more-advanced consumer new empowering technologies so much, that only thoseanalytics technology. Today’s multi-platform technology companies with fast, nimble, cost-effective supply chainsand information environment has given companies more can effectively meet that demand.ways than ever before to connect with consumers, but it’salso made those consumers’ attention spans more fleeting, In Section 2, “New paths for the shopping journey,” one ofand their whims ever-changing. our articles explores “Is the time right to invest in a direct- to-consumer channel?” a question many CPG executivesClorox CFO Steve Robb reflects on this paradox: “Consumer have been asking themselves these days. This is one of theinformation today is much more fragmented. It used to be most fundamental issues of our time, because it gets to theyou could put on a national TV spot and reach all of your root of what CPG companies are, and how they relate toconsumers. But with the Internet, handheld devices, and their retail partners.other sources, consumers are getting information frommany different places. This does not mean national TV Previous years’ editions of this report have included anadvertising isn’t important; of course it is. But it’s not the article on sustainability, and this year is no different. Inonly way to communicate with the consumer. The way we keeping with our demand chain theme, though, this year’slike to say it, you need to talk to the consumer where they article, “Stirring up sustainability demand,” looks at howare listening. And they are listening in different places.” companies today view sustainability efforts as basic “table stakes,” and how the new Holy Grail is stoking consumerWith a better and better integrated demand chain, CPG demand for a product based on its green credentials. Butcompanies will be able to more efficiently and effectively a caveat: Shoppers are wary of inauthenticity and areconnect with consumers, no matter where in the digitally getting overwhelmed by the many sustainability stamps ofconnected world they’re hiding. approval they find all over stores and supermarkets. Section 3 of this report tackles the topic of overseasThe demand chain in this year’s report expansion, and includes practical articles, “Capitalizing on emerging market growth opportunities” and “BeforeIn this year’s report, we’ve made a point of weaving our expanding abroad, dig deeper into the tax implications.”demand chain theme throughout our three sections: But in a further nod to international growth, this yearenabling the demand chain, new paths for the shopping we’ve added a twist to our thinking around what consti-journey, and pursuing growth overseas. tutes a global company. Later in this executive summary, we’ve included a short article on how companies withIn Section 1, the article “Catching up to consumers in the at least 20% of their revenues coming from outside theage of demand” shows how companies are deeply mining United States perform in various metrics, versus compa-digital data to forge new marketing tactics, bundling nies whose international revenue is less than 20%. Thereproduct offerings in new ways, and exploring consumer are many reasons for a company to “go global,” and surelybehavior that’s long been regarded as unknowable—such revenue growth is one way to measure these efforts. 2012 Financial Performance Report4 Profitable Growth: Driving the Demand Chain
  • 9. Economic recovery remains vulnerable on all fronts From input prices to fiscal distress, too much volatility for comfortThe fragile environment of the first half of 2011—with Exhibit 1high unemployment, a weak job market, and mixed Growth in real consumption during selectedeconomic signals—gave way to one of promise. By the recessions and subsequent recoveriessecond half of 2011, the US economy appeared to regainits footing and resume stable, if slow, growth. Positive 16%developments in the labor market and reviving consumerconfidence prevented the economy from slipping back into 14%a downturn. 12%Amid the hopeful signs, risks remain for CPG companies. 10% Solid = RecessionVolatile gas and commodity prices have raised operating Dotted = Recovery 8%costs while making consumers reluctant to boost theirspending significantly. Export markets face their own 6%risks, such as the fallout from the European debt crisis. 4%Federal tax and spending policy changes are scheduled to 2%take effect at the beginning of 2013 unless Congress modi-fies them before year-end, and could have major economic 0%ramifications. -2%For CPG companies, then, it’s been a one-step-forward, -4%one-step-back recovery. “A significant portion of the popu- -6%lation is seeing no income growth, and gasoline prices and 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16healthcare costs are eating away at all disposable income,”says Al Williams, CFO of Bush Brothers. “So while the Quarters since beginning of recessionoverall economy may see some growth, the food industrymight have to lag.” Nov 1973– July 1990– Dec 2007– Mar 1975 Mar 1991 June 2009 Source: Bureau of Economic Analysis, National Income and Product AccountsThe recovery plods along Table 1.1.6, accessed March 2012; PwC calculations.Compared to past recoveries, the current one that beganin mid-2009 has been anemic. High US unemployment Real consumption fell by over 3% during the most recentrates in 2009, 2010, and 2011 combined with low income recession. Total shipments by CPG companies declinedgrowth to hold back consumer spending, and consumer further than overall consumption, but have recovered morehesitancy to return to the market served to dampen vigorously. The value of CPG shipments hit their low inrevenue growth. Real consumption (household spending mid-2009, a level 16% below the high of mid-2008. Throughadjusted for inflation) declined further during the recent mid-2011, shipments increased at an average annual raterecession than in prior recessions, remained low for of around 10%, in contrast to nominal consumption for alla longer period, and increased only modestly during products, which grew an average of 4% annually after thethe recovery. Four years after the recession began, real recovery began.2 However, during the second half of 2011,consumption is only 2% above its pre-recession peak. growth was essentially flat (see Exhibit 2, page 6). TwoBy contrast, four years after the 1990–91 recession, real important developments help to explain the growth in theconsumption had risen 11% from its pre-recession peak, value of shipments in 2010 and 2011, as well as the subse-and four years after the 1973–75 recession, real consump- quent slowdown in 2011: commodity price movements andtion had reached almost 14% higher than its pre-recession consumer spending patterns.peak (see Exhibit 1).5 Executive summary
  • 10. Economic recovery remains vulnerable on all frontsFrom input prices to fiscal distress, too much volatility for comfortEscalating commodity prices squeezeproducers and consumers says Don Mulligan, CFO of General Mills. “It’s when it’s 10% one year and minus 1% the next that it gets tough forInput price increases—a consequence of escalating our industry—which is predicated on consistency, both forcommodity prices—had a major impact on CPG manufac- consumers and investors.”turers last year. The spike in food commodity prices thatbegan in mid-2010 continued through the end of 2011. By the end of 2011, consumer prices were, in turn,By the end of December 2011, the average price of crude 7.6% higher than they were in January 2010. Betweenfoodstuffs (livestock feed as well as inputs for food prod- January 2010 and December 2011, the prices charged byucts) was more than 30% higher than it had been two years producers for finished consumer foods rose 10% whilebefore, in January 2010 (see Exhibit 3). This increase drove the value of shipments of CPG products rose 17%. Theproducer food prices up 10% by the end of 2011. “If infla- increase in sales during this period is largely attributabletion every year was a predictable 4 or 5%, we could adjust,” to this price increase.Exhibit 2 Exhibit 3Value of monthly CPG shipments, 2008–2011 Food prices, 2010–2011 120 40% 115 35% 30% 110 25% 105$ billions 20% 100 15% 95 10% 90 5% 85 0% 80 -5% 2008 2009 2010 2011 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Crude foodstuffs Finished consumer foods Food price to consumers Source: US Census Bureau, “Manufacturers Shipments, Inventories, Source: Bureau of Labor Statistics, values for Consumer Price Index and Orders,” seasonally adjusted values, accessed February 2012. (Food at Home) and Producer Price Index (Crude Foodstuffs and Feedstuffs, Finished Consumer Foods), accessed March 2012. 2012 Financial Performance Report6 Profitable Growth: Driving the Demand Chain
  • 11. Economic recovery remains vulnerable on all fronts From input prices to fiscal distress, too much volatility for comfortUS Department of Agriculture research shows that Exhibit 4approximately 24 cents of every food dollar (food Annual growth in retail spendingconsumed at home) goes to the farm, with the rest going (December-to-December single-year growth rates)to processing, marketing, transportation, and other linksin the food production and distribution chain.3 Giventhe 32.5% increase in commodity prices from January 8.0%2010 to December 2011, food prices to consumers should 7.0%have increased by approximately 8%—and they did. Atthe same time, the significant rise in gas prices (a 20% 6.0%average increase between January 2010 and December20114) has exacerbated the cost pressures on producers. 5.0%This increase squeezed not only CPG companies but also 4.0%consumers, affecting their purchasing decisions. Duringthis same two-year period, average household income rose 3.0%by only 5.7%.5 Thus, households have had to adjust their 2.0%spending to accommodate rising prices in the face of slug-gish income growth. As Bert Alfonso, CFO of The Hershey 1.0%Company, points out, “Consumers are watching how theyshop and what they shop for, and those on the lower end of 0.0%the income scale are living more paycheck to paycheck.” If -1.0%gas prices continue to escalate (as they did in early 2012),households could be forced to reduce their discretionary -2.0%purchases, which could slow the recovery. 2008 2009 2010 2011 Grocery stores Food services and drinking placesAs consumers grow confident, Source: US Census Bureau, “Monthly Retail Trade and Food Services,”restaurants gain March 2012.Just as CPG growth slackened in the second half of 2011, spending. This trend follows the pattern seen after pastthe job market and consumer confidence began to gain recessions: In 1992, following the 1991 recession, house-momentum. hold spending on food consumed at home fell by 0.3% while spending on food away from home increased 0.7%.6Consumers behaved frugally during the recession, forgo-ing dining out. But data from 2011 suggest this trend isreversing. Annual spending at dining and drinking estab- Exports continue their steady riselishments grew more than 7% between December 2010and December 2011; at the same time, grocery store sales Although the US market, given its size, remains a key targetincreased by just over 4% (see Exhibit 4). of CPG companies, opportunities for profitable growth exist overseas as well. In 2011, food manufacturers accountedIf rising consumer confidence leads households to shift for the lion’s share of total CPG exports: 73%, comparedmore of their food dollars to restaurants, that may be a to makers of paper products (16%) and soaps and othergood sign for the economy overall, but it is a less welcomed cleaners (11%).7one if it comes at the expense of those households’ CPG7 Executive summary
  • 12. Economic recovery remains vulnerable on all frontsFrom input prices to fiscal distress, too much volatility for comfortIf an improving US economy revives sales for CPG products, Exhibit 5the continuing globalization of the CPG market holds even Exports of CPG products, by marketgreater potential for CPG companies. Between 2005 and2011, total exports of CPG products essentially doubled,from $40.3 billion to $80.3 billion. The $40 billion increase 90.0was split evenly between traditional export markets (the 80.0European Union, Canada, Japan, and Mexico increased 21from $26 billion to $46 billion) and emerging economies 70.0(which increased from $14 billion to $34 billion) 19(see Exhibit 5). 60.0 19 16 13 $ billionsTo put the $40 billion exports increase in perspective, 50.0 13 12total US grocery store sales rose by $93.5 billion between 10 9 82005 and 2011.8 The US dollar’s strength relative to 40.0 9 7 16the Canadian dollar, the Mexican peso, and the euro in 6 14 30.02011 made US exports to those markets less competitive, 5 13 14although CPG product exports still increased. If the dollar 20.0 12strengthens further in 2012, CPG exports could suffer. 10 11 30 26 10.0 25 24As EU countries tackle the sovereign debt crisis, the 16 19 21fallout in the real economies of those countries could 0erode demand, with US products likely to be impacted 2005 2006 2007 2008 2009 2010 2011disproportionately. Currently, the European Commission NAFTA EU, Japan, Australiaprojects negative growth for the euro zone economies in China/Hong Kong, Taiwan, Other emerging markets2013,9 so the near-term outlook is weak. South Korea, and the Philippines Source: International Trade Administration, TradeStats Express data for importsEmerging markets remain the most promising source and exports, accessed March 2012.of economic growth, as the expanding middle class inthese countries consumes more and, in turn, boosts worlddemand. The Organisation for Economic Co-operation andDevelopment (OECD) estimates that non-OECD countrieswill account for roughly 75% of global economic growth purchasers (China/Hong Kong, Taiwan, South Korea, andbetween 2012 and 2013.10 For example, between 2012 and the Philippines) almost tripled between 2005 and 2011,2014, real growth in China is expected to range between from $5 billion to $13 billion.8.3% and 8.7%, while projections for India are between6.7% and almost 8%.11 Efforts to expand trade between While exports across all categories of products havethe United States and these markets (for example, the free increased, the largest portion is attributable to meat, dairy,trade agreement signed by the United States and South and grain products. As income levels in emerging countriesKorea in 2011) will also help spur US exports. A strength- rise, consumers increase their consumption of protein-ening of the Chinese yuan in 2011 relative to the US dollar based products. General Mills’ Don Mulligan says, “In themade US exports cheaper for Chinese consumers. Indeed, emerging world, as consumers’ income increases, one of theUS exports of CPG products to the largest emerging-nation first things they spend their new wealth on is eating better.” 2012 Financial Performance Report8 Profitable Growth: Driving the Demand Chain
  • 13. Economic recovery remains vulnerable on all fronts From input prices to fiscal distress, too much volatility for comfortUncertainty prevails: policy, political, or negative growth in Europe degrades governmentand other risks finances. Such turmoil would reverberate in the US economy, given the strong connections between the USMany of the projections discussed here assume that current and EU markets.economic trends will continue in 2012. However, as history • Natural disasters. Beyond their direct local affects,shows, significant unanticipated events can create shocks to natural disasters can have much broader impacts.the US and world economies. These include: The earthquake and tsunami that struck Japan in• Policy change. Significant changes that could occur March 2011 had a devastating impact on the region, in US federal tax and spending policies in 2013 may and rippled throughout the world. The supply chain compound the economic uncertainties CPG companies disruptions triggered by the disaster were one of the face. For instance, as Congress considers how best to main factors responsible for sluggish global economic address the expiration of individual income tax rates, growth in the first half of 2011. and whether to cut federal spending to reduce the deficit, economic growth and the housing and labor Cautious optimism, yes, but adaptability markets could be significantly impacted. At the same time, Congress and the Obama administration have been is a must discussing the importance of tax policy in promoting US competitiveness. Considering both the constraints of the The positive economic developments of the past year paint current budget environment and the level of disagree- a more promising picture than we’ve seen since the United ment over such basic questions as how to tax interna- States began emerging from recession in 2009. But for tional income or appropriately distribute the individual CPG companies, market risks persist. Commodity price income tax burden, any reforms to these policies are volatility is expected to continue, so CPG executives will difficult to predict, particularly in an election year. need to factor this development into their sourcing and distribution strategies. Markets in the developed world• Political change. Conflict in sensitive regions across do not represent an easy target for profitable growth, and the world can have broad impacts on the world emerging markets, for all their favorable indications, still economy. For example, tensions in the Middle East can hold the uncertainties of developing economies. Finally, lead to a further rise in oil prices, which could slow new government policies could represent fundamental global and US economic growth. Economists have changes to the tax, regulatory, and operating environment estimated that a sustained $10-per-barrel increase in in which CPG companies compete. the price of oil could lower employment by 120,000 people—almost 0.1% of total employment—after As CPG companies develop supply chain and demand chain one year.12 Additionally, political instability in other plans that extend their geographic reach, addressing the emerging markets could slow the development of these risks associated with such low-likelihood, high-impact markets for CPG companies. events is a challenge. “You can’t build a plan that considers• Financial market distress. Europe has been on a slow a tsunami or an earthquake or a flood,” shares Duane Still, path to resolving challenges associated with the sover- CFO of The Coca-Cola Company’s Coca-Cola Refreshments eign debt crisis in certain euro zone countries, but public operating unit. “The important thing is to build a plan resistance to austerity measures has made finding a with the ability to adjust as we see things happening in the resolution more complicated. The current instability marketplace—staying nimble, informed, and aware of what could give way to more financial market turmoil if slow is going on for both contingency reasons and competitive reasons and adapting as we need to.”9 Executive summary
  • 14. Economic recovery remains vulnerable on all frontsFrom input prices to fiscal distress, too much volatility for comfort CPG economic impact The CPG sector produces a variety of products, purchasing intermediate inputs from other parts of the economy and transforming them for final consumption. The industry’s employees and its suppliers spend incomes earned in this production throughout the economy. The overall economic impact of the industry includes these separate components. In October 2011, the GMA released a report prepared by PwC on the CPG sector’s overall contribution to the US economy.13 The report found that in 2009, the industry was directly responsible for 1.7 million jobs, paid $94 billion in labor income, and contributed over $170 billion to US GDP (or “value added”). When the impacts of its supply chain and employee spending are included, the sector was responsible for 10.8 million jobs and contributed over $900 billion to US GDP (or “value added”). Direct Total Employees (millions) 1.7 10.8 Labor income ($ billions) $94.3 $518.5 Value added ($ billions) $172.9 $93.6 Since 2009, employment in the CPG sector has remained relatively flat. While the US economy experienced accelerating job growth in 2011, employment in CPG companies remained at 1.7 million. Companies have been able to increase productivity without expanding their workforces. 2012 Financial Performance Report10 Profitable Growth: Driving the Demand Chain
  • 15. A top-performing company analysis Breaking down the performance of the CPG sector’s top-performing companies (TPCs) Despite signs of ongoing recovery in the overall economy, CPG companies for which we gathered publicly available CPG companies continue to face challenges affecting both data. We then sorted 53 large and very large companies operating costs and demand. These include volatility into performance quartiles. in commodity prices, risks to export markets stemming from the European debt crisis, restrictive federal tax and We avoided measuring companies primarily on share- spending policy changes that could take effect early in holder return. This standard corporate barometer, while 2013, and persistent belt-tightening among key customer obviously important to investors, is relatively narrow. segments—to name just a few. Instead, we took a more balanced approach by assigning scores to the 53 companies based on their relative perfor-As John Gehring, CFO of ConAgra, notes, “I’d call the mance across three fundamental metrics:mood cautious optimism. For us, the challenge is that the • Economic profit spread, which is based on return oneconomic downturn has disproportionately affected the invested capital (ROIC) and the weighted average costpeople who are our core consumers—those making less of capital (WACC)than $50,000. High unemployment and high gas prices putan incredible toll on people in this group.” • Return on assets • Free cash flow relative to salesGiven the confluence of forces buffeting the CPG industry,perhaps it’s not surprising that while sales grew somewhatduring 2011, margins and cash flow decreased slightly and Informed by this breakdown, we compared groups ofearnings were flat for many companies. Yet some busi- the ranked companies across many different financialnesses still managed to produce healthy margins, free cash indicators, including growth, profitability, liquidity, andflow, and other positive financial results. They continued leverage. We were particularly interested in looking at thebuilding their brands in fast-growing emerging markets, top quartile (best performers) versus the bottom quartileand were able to balance long-term investment with (weakest performers) to isolate those business drivers thatsmart cost management in ways that generated substan- might further explain their ranking.tial dividends for shareholders. What separated these topperformers from their more ordinary peers? As in previous Of the 13 top-quartile companies, five are in the householdyears, we set out to discover possible answers to this products sector, four in beverage, and four in food. Ourintriguing question. analysis reveals that this year, the top performers were distinguished from the bottom quartile in the same five areas we identified for the previous year’s analysis: PwC’s performance ranking • Gross margins, which remain significantly stronger among top performers than in the bottom quartile For this year’s analysis, we examined CPG companies using a variety of financial metrics, then analyzed to find • Spending on strategic selling, general, and adminis- which common characteristics link the companies that trative (SG&A) expenses, which has become relatively ranked highest against those metrics during 2011, and flat in the top quartile while decreasing in the bottom whether and how those characteristics have changed over quartile the past five years. We reviewed the total sample of 142 • Operating profitability, which remains consistent for our top-performing companies11 Executive summary
  • 16. A top-performing company analysisBreaking down the performance of the CPGsector’s top-performing companies (TPCs)• Liquidity, which continues to give top companies more Despite the differences in net sales growth increases, the options for making strategic moves, including acquisi- top performers in our analysis are still producing higher tions and increases in dividends gross margins than the bottom performers. Indeed, in 2011, the gap between the two groups’ median gross• Managed debt capacity, as represented by the best margin was nearly 40 percentage points, the largest we’ve performers’ greater ability to cover interest payments seen since we began conducting this analysis. Our analysis showed that each of the companies in the top group had atIn addition to our index of the large and very large top least one brand in a number-one or number-two positionperformers, we applied a similar scoring methodology to during 2011.the medium- and small-company segments. As we contrastthe performance of the top and bottom quartiles for our Gross margin for the top increased by 1.8%; for the bottomlarge and very large top performers, we will highlight group, it decreased by 1.6% (see Exhibit 7, page 13). Not onlyoutcomes for medium and small players only where there did top performers react to commodity price increases byis a significant difference. more quickly passing those costs along to the consumer, but their improved margins are representative of the strengthBottom performers pick up net sales of their brands. Savvy commodity hedging and product mix strategies may also have contributed to the trend.growth but lag in marginBoth the top-performing and bottom-performing groupshad seen their sales growth revive in 2010. During 2011,the two groups enjoyed continued revival of growth, Exhibit 6but, for the first time since 2008, the bottom-performing TPC median net sales growthgroup enjoyed higher net sales growth (11.4%) thanthe top-performing group (7.2%) (see Exhibit 6). Thisrepresented just a 2.5% improvement for the top group, 20%significantly lower than the 10.6% improvement gainedby the bottom group. The top-performing group weath-ered the recession without any years of declining net 10%sales, likely because they had the money to continue toinvest in marketing, promotions, and trade. The bottomperformers, however, are beginning to pick up groundfrom a top-line perspective—though it’s easier to pick 0%up percentage growth when recovering from a net salesdecline in 2009 and nearly flat sales in 2010.One driver of net sales growth is increasing prices in -10%reaction to rising input costs, and while top performersbegan to implement this in 2010, the bottom performerswere slower to react and, in some cases, didn’t getpricing in until 2011. Another driver for the bottom -20%performers is buying growth with lower margins. 2007 2008 2009 2010 2011 Top-performing quartile Bottom-performing quartile Source: Reuters Fundamentals, Reuters Pricing, and PwC Analysis. 2012 Financial Performance Report12 Profitable Growth: Driving the Demand Chain
  • 17. A top-performing company analysis Breaking down the performance of the CPG sector’s top-performing companies (TPCs)Flatter SG&A spending Investment in brands and in long-term positioning remains a significant predictor of performance and is crit-Large CPG companies make substantial investments in ical to effective demand chain management. For example,innovative products as well as in marketing and adver- many of our top performers have continued to investtising to support their core brands and drive future heavily to promote corporate brands in emerging markets,growth. Over the past five years, our top-performing with the goal of building trust and mindshare amongcompanies have spent more on defending their market hundreds of millions of consumers. Explains Hershey CFOshare than have the bottom-performing companies, Bert Alfonso, “I think that more investment and hiring areas measured by SG&A spending relative to sales (see happening in emerging markets as compared to the US.”Exhibit 8). In 2011, SG&A spending in the top quartileremained essentially flat (decreasing slightly from 26.3% Some top performers also have expanded their sustain-to 26.1%) while in the bottom quartile it decreased by ability initiatives with an eye toward controlling costs and4.5%. Top-performing companies may have more cash risks while at the same time driving growth by buildingavailable than their less successful counterparts to begin on consumers’ interest in socially and environmentallyreinvesting in research and development (R&D), innova- responsible products. As ConAgra’s John Gehring explains,tion, marketing, and other initiatives such as sustain- “Sustainability is one of five elements in our Recipe forability, all with the goal of driving future growth. Growth strategy. In this most recent year, we met our goal of being included in the Dow Jones Sustainability Index.Exhibit 7 Exhibit 8TPC median gross margin TPC median SG&A as a percentage of sales 80% 50% 40% 60% 30% 40% 20% 20% 10% 0% 0% 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 Top-performing quartile Bottom-performing quartile Top-performing quartile Bottom-performing quartile Source: Reuters Fundamentals, Reuters Pricing, and PwC Analysis. Source: Reuters Fundamentals, Reuters Pricing, and PwC Analysis.13 Executive summary
  • 18. A top-performing company analysisBreaking down the performance of the CPGsector’s top-performing companies (TPCs)We’ve also got a huge campaign going on regarding ending periods. Whereas the gap in free cash flow to sales ischildhood hunger—‘Childhood Hunger Ends Here’—and 11.8 percentage points for the one-year analysis, it riseswe’re working with several large customers around joint to 13.2 and 13.6 for the three- and five-year analyses,promotions in this area.” respectively. Even with relatively flat SG&A spending, having capital available provides top-performing compa-So some SG&A costs are “good” in the sense of investing nies with liquidity as well as room to think and act strate-for future growth, while other costs are “bad” over- gically. For instance, top-performing companies are wellhead and should be continually tightened. As Coca-Cola positioned to make more acquisitions or increase theirRefreshments’ CFO Duane Still explains, “It all goes into dividends. Bottom performers are generating less cash,SG&A, but we’ve been trying to take more of the ‘G&A’ and and their limited access to credit means they don’t havemove it into the ‘S.’ That lets us get out of what we call non- the luxury of hoarding what little cash they have to defendworking spend and put it into working spend. We can put their market share.it into marketing, advertising, sales force capabilities, andother things that drive productive growth.” Exhibit 9Maintaining strong cash flow and TPC median free cash flow to salesreducing debt costs 25%As the continued significant gap between quartiles shown inExhibit 9 illustrates, the top-performing CPG companies arestill generating and hoarding more cash than the bottom 20%performers: 14.4% cash flow to sales for the top performersversus 2.6% for the bottom quartile. Clearly, top-performing 16.7 16.1companies continue to enjoy strong cash flow (possibly as 14.4 15%a result of pricing actions), but their greater percentage ofcash on hand may also be due to belt tightening and effec-tive expense management. The hoarding of cash during 10%the recession may have positioned the top performers tochannel cash toward investments in R&D, marketing, andother key business activities, particularly in this past year,driving slightly lower free cash flow levels in the one-year 5% 3.5 2.6period as compared to the three- and five-year periods 2.5yet contributing to the maintenance of the near 40-point 0%disparity in margin. 1-year 3-year 5-yearThis theory of increased strategic spending by top Top-performing quartile Bottom-performing quartileperformers during the economic recovery period isevidenced also in the narrowing gap between top andbottom performers compared to the three- and five-year Source: Reuters Fundamentals, Reuters Pricing, and PwC Analysis. 2012 Financial Performance Report14 Profitable Growth: Driving the Demand Chain
  • 19. A top-performing company analysis Breaking down the performance of the CPG sector’s top-performing companies (TPCs)A review of the median interest coverage ratio is consis- For medium and small companies, the debt-to-equitytent with this trend. Both top and bottom performers are ratio measured consistent for top and bottom performersfocused on reducing the cost of debt (see Exhibit 10), but in 2010; however, the bottom performers took on moretop-performing companies find it easier to manage the debt in 2011, as borrowing became more readily avail-debt they retain. The bottom quartile has to cover higher able and interest rates hit record lows.interest payments, which weakens their balance sheets.However, the narrowing gap between top and bottom A related variable is the cash conversion cycle, whichperformers’ debt-to-equity ratios over the past five years highlights the speed (in days) with which companies can(see Exhibit 11) suggests that both are paying down debt. turn assets into cash. The lower the number of days, theExhibit 10 Exhibit 11TPC median interest coverage ratio TPC debt-to-equity ratio 30% 3.0 20% 2.0 10% 1.0 0% 0.0 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 Top-performing quartile Bottom-performing quartile Top-performing quartile Bottom-performing quartile Source: Reuters Fundamentals, Reuters Pricing, and PwC Analysis. Source: Reuters Fundamentals, Reuters Pricing, and PwC Analysis.15 Executive summary
  • 20. A top-performing company analysisBreaking down the performance of the CPGsector’s top-performing companies (TPCs) more efficiently a company gets cash in the door. We see the top companies saw EBIT growth drop from 7.6% in in Exhibit 12 that top performers have a stronger ability 2010 to 2.2% in 2011. For the poorer performers, the drop to manage their day-to-day cash flow. However, both was much more extreme, from 32.3% to negative 22.0% the top- and bottom-performing groups improved their in the same period—perhaps because, even though sales ability slightly during 2011, with the bottom quartile increased for the bottom quartile during this period, these improving at a somewhat larger rate. companies’ margins suffered. Coming off strong growth from 2010 to 2011 (owing to a very weak 2009), EBIT percentages decreased for all companies during this period. A deeper look at profitability To probe a bit deeper, we examined net operating profits A substantial gap in profitability, more so than sales, after tax (NOPAT) margin (see Exhibit 14, page 17). distinguishes the top and bottom quartiles in our analy- For our top performers, the NOPAT margin has hovered sis this year. Earnings before interest and taxes (EBIT) around 15% during the five-year period, while the bottom growth supports the notion that the top performers are performers’ margin has ranged between 2% and 4%, more consistent than the bottom. As shown in Exhibit 13, hitting the latter in 2010. A possible explanation for theExhibit 12 Exhibit 13TPC median cash conversion cycle TPC median EBIT growth 120 40% 100 20% 80 60 0% 40 -20% 20 0 -40% 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 Top-performing quartile Bottom-performing quartile Top-performing quartile Bottom-performing quartile Source: Reuters Fundamentals, Reuters Pricing, and PwC Analysis. Source: Reuters Fundamentals, Reuters Pricing, and PwC Analysis. 2012 Financial Performance Report16 Profitable Growth: Driving the Demand Chain
  • 21. A top-performing company analysis Breaking down the performance of the CPG sector’s top-performing companies (TPCs)profitability gap between top and bottom performers may stable returns over the long run, with a major gap appearingbe that the best-performing companies can manage tax in the one-year period we analyzed. Top companies arerates more effectively through international expansion. better equipped to handle tough economic environmentsAs ConAgra’s John Gehring says, “With Japan lowering and thus became even more attractive to investors in 2011.its tax rate, the US now has the highest corporate tax ratein the world. So almost any expansion into international The Clorox Company has a strong track record of growingmarkets will create additional financial leverage.” total shareholder return.14 CFO Steve Robb says, “We are focused on the fundamentals—growing sales through innovation and strong brand-building. Increasing marginsA final snapshot on shareholder return through multi-year cost-savings programs. Managing cash in a stockholder-friendly way. Over the last seven years,Given the consistent performance gap between the top and we have repurchased about 40% of our shares and doubledbottom quartiles along all these metrics, it’s not surprising the dividend.”that shareholder return shows a similar trend. Exhibit 15illustrates how top performers provide higher and moreExhibit 14 Exhibit 15TPC median net operating profit after tax (NOPAT) margin TPC median shareholder return 20% 40% 30% 15% 20% 9.6 10.8 10% 10% 3.3 1.6 0% -1.4 5% -10% -11.8 0% -20% 2007 2008 2009 2010 2011 1–year 3–year 5–year Top-performing quartile Bottom-performing quartile Top-performing quartile Bottom-performing quartile Source: Reuters Fundamentals, Reuters Pricing, and PwC Analysis. Source: Reuters Fundamentals, Reuters Pricing, and PwC Analysis.17 Executive summary
  • 22. Getting on the global map The advantages of a global sales baseThere are as many ways to be a global company as there it’s worth pointing out that small CPG companies thatare companies. In the interviews we conducted for this actively court non-US sales can achieve more than 20%report, we heard all sorts of ideas about what success sales outside the Unites States.looks like on the global stage. For example, SunnyDelight’s Bill Schumacher says that his company wantsto “crack the code in China.” Clorox CFO Steve Robb High risk, high rewardsees his company’s plans partly as a demographic play inemerging markets that will allow the company to intro- In terms of spotting some trends that distinguish the globalduce progressively more profitable products: “As econo- sales group, it’s striking how well these organizations havemies continue to develop, consumers will have additional bounced back from the Great Recession, but also sobering topurchasing power, which means not only that they’ll see how far they fell in the first place. Exhibit 16 shows thatbe using more products, but also that they’ll be able to companies with at least 20% global sales nosedived duringtrade up to more value-added products over time,” Robb 2009 to well below negative growth, while domestic compa-says. At Hershey, CFO Bert Alfonso says that being a nies experienced a much shallower dive, falling to belowglobal company is often a matter of taste, which requires 5% sales growth.research and testing to get right. “Take chocolate as anexample,” Alfonso says. “Depending on the market, itcould be sweeter or less sweet, it can have more cocoabutter or a lower milk content. So you do have to formu-late products for the local taste. That takes some R&D; it Exhibit 16takes some consumer insight to formulate your brands so Median net sales growththat they have the most acceptable local profile. You wantto formulate the product, even with something as widely 20%consumed as chocolate, to be local.”Since there are so many different ways to go about beinga global player—many in the eye of the beholder—we’ve 10%decided in this year’s report to base our observationsaround one metric: percentage of non-US sales. Wecompared companies with “significant” non-US (global) 0%sales and those without, using 20% as our indicator of“significant” global sales.Overall, 68 out of our sample of 142 companies experienced -10%significant global sales. The first and most obvious conclu-sion to draw is that, as expected, size matters, though not tothe point of being a fait accompli. Out of the 35 very largecompanies in our benchmarking sample, 29 (or 83%) had -20%significant global sales as defined by our 20% baseline. 2007 2008 2009 2010 2011Conversely, just 4 of our 30 small companies in the samplequalified as having significant global sales—not surprising Domestic Globalgiven that most maintain a distinctively domestic focus.So, generally, having more than $10 billion in net sales is avery good indicator of significant global sales. But, again, Source: Reuters Fundamentals, Reuters Pricing, and PwC Analysis. 2012 Financial Performance Report18 Profitable Growth: Driving the Demand Chain
  • 23. Getting on the global map The advantages of a global sales baseBut ever since 2009, global companies have ridden the smaller, it’s still more difficult to collect receivables fromwave of strong emerging market demand (most likely in abroad, make sure payments are accounted for, etc.Asia and Brazil), and net sales growth was back over 10% As shown in Exhibit 17, it takes significantly longer forfor 2011. The takeaway is that global companies bene- global companies to convert a sales transaction into afited as emerging markets rebounded much faster, and collected receivable.may continue to be in a good position if the “new normal”persists and developed market consumption does not But that’s a relative nuisance compared to some of the bigreturn to pre-crisis levels. One positive for domestic advantages of booking a good portion of sales outside thecompanies is that the consistency of the US consumption United States. For example, the rock-solid global companybase, even during downturns, means that those compa- effective tax rate of about 27% across five years (seenies might not experience the kind of volatile swings Exhibit 18) would be much envied by our domestic cohort,seen at companies with more global sales. whose collective effective tax rate hovered north of 35% during the same time period. While the Obama adminis-Another advantage the domestic companies tend to have tration and Congress have proposed a number of initia-is more efficiency in the actual business of selling goods tives to bring down the US corporate tax rate, little actionand collecting payments. While the world has gotten has occurred to actually effect change.Exhibit 17 Exhibit 18Median cash conversion cycle Median effective tax rate 80 40%60 30%40 20%20 10% 0 0% 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 Domestic Global Domestic Global Source: Reuters Fundamentals, Reuters Pricing, and PwC Analysis. Source: Reuters Fundamentals, Reuters Pricing, and PwC Analysis.19 Executive summary
  • 24. Getting on the global mapThe advantages of a global sales baseGlobal companies also have higher free cash flow to sales have been increasingly more productive than global compa-and return on invested capital (see Exhibits 19 and 20). It’s nies over the past three years. But that presumed advan-a good bet that global companies (a segment that contains tage doesn’t really bode well either for those companiesmany organizations we categorize as “very large”) enjoy or the larger United States employment picture. Given thebetter infrastructures and more efficient processes to priori- generally slow sales growth in the United States, domestictize investments, manage portfolios, and execute and track company productivity is logically grounded in a slow hiringthe success of investments. ramp-up, rather than in significant growth. In essence, the global companies are less productive because their globalOne area in which it appears domestic companies are footprints mean they are hiring people in faster-growingoutperforming global companies is productivity. As parts of the world.Exhibit 21 (page 21) illustrates, domestic companiesExhibit 19 Exhibit 20Median free cash flow to sales Median return on invested capital 15% 15% 9.9 10.0 10% 10% 9.5 9.6 9.0 8.2 7.6 7.0 7.2 5.6 5.4 5% 4.8 5% 0% 0% 1-year 3-year 5-year 1-year 3-year 5-year Domestic Global Domestic Global Source: Reuters Fundamentals, Reuters Pricing, and PwC Analysis. Source: Reuters Fundamentals, Reuters Pricing, and PwC Analysis. 2012 Financial Performance Report20 Profitable Growth: Driving the Demand Chain
  • 25. Getting on the global map The advantages of a global sales baseSome of our other data also support the idea that global a one-way broadcast message to consumers has longcompanies are less productive because they are investing passed. Today’s consumer spends more time online andback into their organizations. For example, Exhibit 22 on mobile than they do surfing TV channels, so we areshows that global companies are continuing to spend on redirecting advertising and promotion funds. In fact,items like advertising. And that’s a trend that exists well digital now represents more than 20% of our total mediabeyond the CPG universe: In 2011, global spending on spend in North America.”advertising rose 3.4% overall, down from the 6.9% gainin 2010 but still healthy growth.15 A larger portion of this While there might be many ways for companies to bespending is going to the digital space. Chris Davies, North “global,” building a healthy non-US sales base seems to beAmerican CFO of Diageo, explains: “The old model of one investment that pays off.Exhibit 21 Exhibit 22Median sales per employee Median SG&A as a percentage of sales $600K 40% 30% $400K 20% $200K 10% 0% $0K 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 Domestic Global Domestic Global Source: Reuters Fundamentals, Reuters Pricing, and PwC Analysis. Source: Reuters Fundamentals, Reuters Pricing, and PwC Analysis.21 Executive summary
  • 26. Section 1 Enabling the demand chain Consumer demand rules in today’s CPG markets. Companies have made many improvements to the supply chain in recent years, but the demand chain is still terra incognita, with plenty of wilderness to explore. The ability to create demand—repeat- edly and in any channel—will separate the winners from the losers in CPG markets, though the supply chain will still play a role since it must effectively and quickly satisfy the demand a company creates—a task that’s complicated by the explo- sion of information technology (IT) and social media. Winning through the demand chain also involves innovation of the entrepreneurial, not incremental, variety. So get familiar with co-creation, open innovation, and other guides to help you navi- gate to the promised land. 2012 Financial Performance Report22 Profitable Growth: Driving the Demand Chain
  • 27. Catching up to consumers in the age of demand Anticipating what consumers will want, exactly when and how they want itWelcome to the age of demand. For CPG companies today, Digital tools have also made it possible for manufac-the winners will distinguish themselves from the losers not turers to tailor offerings to ever-finer consumer segments.just by understanding the nature of demand but by creating Companies are now able to apply advanced analytics todemand, and doing so repeatedly, in developed and devel- massive volumes of market data to spot incipient shifts inoping markets, in any channel of the consumer’s choosing. consumer behavior, sense competitor moves, and predict coming trends.The supply chain still matters, too, but strategy and execu-tion on the demand side require more attention. Indeed, Once all of these capabilities became possible, they became65% of global CEOs and 75% of US CEOs recognize that essential. CPG companies will meet higher consumer expec-consumer demand will be the biggest factor driving tations, or their competitors will. They will be first to drawstrategy in the coming year.16 And virtually the same meaningful insights from shifts in consumer behavior, ornumber expect to change their consumer connectivity they will watch their market share erode.technologies this year.17Don Mulligan, CFO of General Mills, describes the attention Predicting the next signalshift in this way: “Companies can still drive competitive from consumersadvantage through the supply chain, but the margin on thatadvantage is getting narrower. Going forward, the winners Putting the demand chain at center stage means puttingwill be whoever has the best marketing ideas, the strongest the consumer there as well. CPG companies need tosales organizations, and the right service delivery. That is use the digital tools now available to them to achieve athe demand chain.” far deeper, more granular understanding of consumer behavior, then drive all marketing, sales, and service deci-“You can’t cost-cut your way to success today,” adds Hershey sions from those insights.CFO Bert Alfonso. “Sales or top-line growth has been harderto come by than cost management. And so there is a greater This approach would give CPG companies other leversfocus on consumer trends and exploring the consumer land- besides price to differentiate themselves. As an example,scape now. Consumers may be value oriented but they still Sunny Delight’s Bill Schumacher describes how the SunnyDwant quality—and brands represent quality.” brand achieves a respectable market share in a category dominated by two other big brands: “We want to identifyA quarter of global consumers and nearly one third of US who the real user is for our product and construct a productconsumers claim companies usually fail to satisfy their tailor-made for that user. We are midway through theexpectations. Most consumers would be willing to spend work of flipping this existing brand upside down to meet amore with companies that met their needs.18 The gap in specific consumer need. That’s better than staying wherecompanies’ ability to anticipate and create demand is huge, we are and continuing to slug it out with price.”and therefore so is the opportunity. Deeper insight helps companies select new marketingDigital tools have raised the bar by empowering consumers tactics, such as bundling offerings in new ways or commu-to search for product information, to communicate easily nicating a different value proposition suited to the segment.with fellow consumers, and to know almost as much as a Bush Brothers is exploring a variety of such tactics for bakedmanufacturer does about a product market. Increasingly bean products that consumers buy frequently one year andsavvy consumers have come to expect distinctive, high- then inexplicably ignore the next. “Of course people gotouch experiences and direct communication with brands through phases,” said CFO Al Williams. “We are trying toin near real time. understand why products are relevant at one time and not23 Section 1: Enabling the demand chain
  • 28. 2012 Financial Performance Report24 Profitable Growth: Driving the Demand Chain
  • 29. Catching up to consumers in the age of demand Anticipating what consumers will want, exactly when and how they want itat others. And then find ways to become relevant with the Clearly, technology is an enabler in attaining a razor-sharpsame products, a different product, or other types of inno- consumer focus. While maintaining product-specificvation. Keeping half of the consumers who drop us in a year metrics, companies must implement the technology towould grow business substantially.” capture, analyze, and disseminate consumer-specific data, both structured and unstructured. (See the sidebar “BigEven more vital for CPG companies to master are macro- data: Both a competitive imperative and an opportunity,”trends that affect multiple categories, such as the recent page 28.)industry-wide downturn in packaged food volumes.“There has been some change in consumer behavior To defend market share and to meet consumer expecta-around food that no one has fully figured out,” says John tions, companies’ reaction times must now be measuredGehring of ConAgra. “What are people eating? Are they in minutes, not days or weeks. Nongfu Spring, a Chineseusing food differently? Are they stretching food further? bottled water company, is well on its way to delivering andAre they using more leftovers?” then acting on “speed of thought” insight20 from analysis of big data.Investing in a more consumer- In the past, Nongfu devoted two days to collecting andcentric organization producing point-of-sale (POS) retail data. Using new analytics tools, Nongfu now loads data in real time,Consumer-centricity is not a new idea, but moving the allowing reports and queries to run up to 300 times faster.consumer to the crux of the demand chain requires One business process that previously took 24 hours toa significant investment and a long runway. Hershey complete now finishes in a mere 37 seconds.21 By capturinglaunched its deep dive on consumer understanding four the data more quickly and providing relevant analysis toyears ago, for example. And according to Anthony van planners, Nongfu has been able to improve customer shelfder Hoek, director of strategy and business solutions in-stock levels.at the Coca-Cola Company, “It takes years, not weeks,to embed consumer conversations in an organization. In addition, having multiple channels to the consumerCompanies need to address this now or it will be a huge drives additional complexities. Creating a true omni-challenge to catch up.”19 channel experience for consumers is one manifestation of a company’s success in marrying product- and consumer-For the transformation to be successful, every function must centric mindsets. (See the sidebar “Evolution of terms,”evolve to integrate both internally facing (product-centric) page 26.)and externally facing (consumer-centric) mindsets. Customers expect to feel connected to a brand at allIn marketing, for example, the shift to a consumer-centric touchpoints. Consumer-centric organizations understandorganization entails creating new analytical abilities and the interactions across the channels, and can provide thepoints of view. Consumer needs must be considered along consumer with the right product in the right channel atwith product lines, and new sources of data (e.g., socioeco- the right price.nomic, web-based) must be incorporated so that marketerscan generate deeper and more complex insights to createmeaning for consumers.25 Section 1: Enabling the demand chain
  • 30. Catching up to consumers in the age of demandAnticipating what consumers will want, exactly when andhow they want it Five guideposts for creating consumer Evolution of terms demand Over the past two decades, different terms have been The ability to create consumer demand depends on the used to describe brands’ digital strategies. quality of consumer insights that inform a company’s • E-tailing/e-retailing. First used in the 1990s, decisions. Executives can use these five guideposts in this shortened form of “electronic retailing” refers assessing how well they are positioned to meet consumer to selling online. It does not necessarily extend expectations. to more recently emerged forms of electronic 1. You are creating a consistent consumer experience commerce such as social or mobile retail. of the brand across all channels and touchpoints • E-commerce/digital commerce. A business trans- Dividing lines between channels and roles become action conducted electronically. hazier every day. Consumers are not focused on chan- • Multichannel. This term has been used in the last nels; rather, they expect a seamless experience of the decade when companies built separate, distinct brand wherever they interact with it. As General Mills’ channels to sell products to consumers. The Don Mulligan says, “We’re agnostic to the channel. We catalog, online, and brick-and-mortar channels want to be where the consumers are going, and we want typically did not share data, and consumers would to shape those channels’ growth opportunities.” not necessarily know if a product they found online was available at a store. Simply having multiple One of the critical challenges in omnichannel is channels was the goal. obsolescence of the touchpoint before a brand puts content in the marketplace. As Coca-Cola’s Duane Still • Omnichannel. Having multiple channels is no says, “The challenge is knowing which technology longer enough. “Omnichannel” implies that the has staying power, which technology will become brand presents a single, seamless face to the the standard, and how we focus the spend so that we consumer across all channels, a “shopping any way, maximize the impact of our investment as opposed to anywhere” experience that encompasses browsing just trying to do everything all at once.” and shopping on a mobile phone, electing to pick up and pay for items at a retail location, and adding 2. You are listening to consumers items in the store, before checking out. Eighty-two percent of the world’s online population • F-commerce. Commerce transacted through uses social media,22 yet PwC research has shown Facebook storefronts. that only 37% of companies have invested in social media tools to understand consumers.23 This discon- nect underscores a missed opportunity to walk beside consumers on their shopping journeys and capture unique, timely, and relevant insights from their actions. Listening to your consumers in a social media setting can also provide advance signals of nascent trends, both positive and negative. Better to listen early than after the storm has hit. 2012 Financial Performance Report26 Profitable Growth: Driving the Demand Chain
  • 31. Catching up to consumers in the age of demand Anticipating what consumers will want, exactly when and how they want it Nearly half of the CPG manufacturers analyzed in 4. You are benefiting from new insights garnered from our benchmarking study generate more than 20% of economics and psychology sales globally, and in many of these foreign markets, the digital experience is different. For some it is more Behavioral economics, which combines classical mobile-phone-based, and for others it doesn’t yet exist. economics and behavioral psychology, can help compa- Regardless of the source, companies need to make nies understand how consumers actually make deci- sure they are listening to consumers, and using a local sions. Southwest Airlines research found that bag fees ear. The key is to be gathering data and generating evoked a strong emotional response from passengers. insights from the local market to drive product and As a result, it declined to impose fees for first and channel solutions. second checked bags when all the other major US carriers did, and began framing its offers with the “Bags3. You are focused on the right things and using the Fly Free” slogan. In 2010 and 2011, the campaign’s right data first two full years, Southwest posted its biggest recent The volume, format, and detail of consumer data annual revenue increases: $1.75 billion and $3.55 present barriers to insight. Corporate Executive Board billion, respectively.26 research finds that 85% of data captured by companies, 5. You are conducting bottom-up experiments based such as freeform text, are unstructured and inherently on new insights more difficult to analyze.24 To react fast enough to consumer trends, brand teams While it might be easier to look at classic structured data, cannot wait for top management to approve test-and- organizations must learn to discern between the signal learn cycles. Instead, CPG companies can institute and the noise in the unstructured data. What is new is criteria to help teams structure waves of experiments, that the consumer insight can come from many previ- starting with the areas of greatest opportunity. ously unexplored areas, and can come more quickly. These experiments may produce new channels (see Next-generation social intelligence tools, such as “Is the time right to invest in a direct-to-consumer natural language analysis, allow companies to analyze channel?” in Section 2) as well as new products, context, mood, and intent within consumer conver- services, or approaches to communicating brand sations. Then companies can identify the attitudes, value (see “Play-to-win innovations: Disrupting the unspoken needs, and motivations behind purchase demand chain,” later in this section). They may also decisions. (For more on this topic, see Section 2 of this help companies explore the differences in the demand report, “New paths for the shopping journey.”) chain for developed versus developing markets. In addition, CPG companies are turning to predic- tive analytics to make educated bets on future Managing the demand chain for growth events rather than build strategy on the present or the past. One such tool can evaluate the impact of Domestic market growth in the Unites States remains slow, pricing actions before putting them into effect—a far but there is a huge proliferation of available consumer faster approach than running tests in geographically information. This intersection of challenge and opportu- dispersed markets and then analyzing the results. In nity provides a window through which manufacturers and addition to being effective, analytics software solu- retailers can tap into consumer demand more effectively. tions are also becoming more affordable due to the By mining data and instilling a culture of listening to the increasing number of providers.25 consumer, cutting-edge companies will be able to begin to shift the focus to more effectively meet consumer needs and then proactively manage the demand chain for growth.27 Section 1: Enabling the demand chain
  • 32. Catching up to consumers in the age of demandAnticipating what consumers will want, exactly when andhow they want it Big data: Both a competitive imperative Traditional approaches to implementing big data focus and an opportunity on technology-driven initiatives that drive commonality and efficiencies, but for the most part minimize “human “Big data” is most commonly understood to encompass interaction” with the solution. Such approaches can be the technologies and tools necessary for the gathering, expensive, counter-productive, and a major barrier to storing, and supporting of large volumes of structured delivering data-driven insights and decision-making. A and unstructured data captured by companies from better philosophy is centered on how big data can work multimedia, social media, and the Internet. PwC expands in conjunction with existing processes to aid and evolve that definition to include business intelligence and infor- your stakeholders’ decision-making processes, rather than mation analytics. trying to replace them. The following example illustrates this approach of leveraging a mix of structured and unstructured data and, through collaboration, driving Big data is how companies leverage the massive amounts significant improvements in consumer-facing results. of data and information that have recently become avail- able to solve business problems. The definition covers the technologies, organization, and processes required to A large manufacturer of food and beverage brands, drive decisions from these huge volumes of data. headquartered in the United States, has successfully deployed a custom demand-driven replenishment system. The impetus for the initiative was the out-of-stock and Exhibit 23 growing backroom inventory at retailers, resulting in The big data ecosystem lost opportunity and higher inventory holding cost. The average out-of-stock was 13%, significantly higher than the industry average of 8%. Backroom inventory was also Business syste higher than the average. ms ia The solution uses time series models to predict weekly d demand at a store level for each stock-keeping unit (SKU). me The analytic models are embedded in the company’s ial Poi Soc “Big mobile applications and processes. Now fully imple- nt of sale mented, the solution yields around 70% reduction in out- data” of-stocks, 10% reduction in backroom inventory, and 15% reduction in headcount, which represents a $20 million annual earnings before interest, taxes, depreciation, and amortization (EBITDA) contribution.  Mo b il it y c e et pla O n li n e m ark Source: PwC. 2012 Financial Performance Report28 Profitable Growth: Driving the Demand Chain
  • 33. Are your demand and supply chains in synch? The new imperative: speed, flexibility, alignment, and integrationConsumers have always had influence, but today they have Tradition has served us wellsignificantly more influence over what and where they buy.With the proliferation of digital channels, they have more CPG companies have long focused process innovation andpurchasing options than ever before, as well as more infor- operational improvement efforts on their supply chains,mation to inform their choices. striving for greater efficiency in procurement, manufac- turing processes, and distribution channels. To supportMeeting the evolving and increasing demands of these improvements, companies have fine-tuned supportingconsumers, and therefore driving profitable growth, activities such as IT and infrastructure management,requires more from CPG companies than in the past. Supply customer service, inventory management, and supply chainchain innovation is less of a differentiator, so companies partnership management.are relying on their demand chains for substantial growth.Changing their business models is helping them to pursue In fact, until recently, leading companies spent almost twicemarket white spaces, to disrupt markets with innovative as much as their peers on supply chain initiatives focusedideas, and to customize solutions for smaller and smaller on bolstering long-term profitability.27 Customer satisfac-slices of the market, essentially targeting their efforts to tion was the primary goal of these companies’ innovationsspecific demographic subsectors. to improve operational performance, under the assumption that better product availability would drive sales growthTo a large extent, these business model innovations are and build customer loyalty. Increasingly divergent retailermade possible by real-time conversations and collabora- demands drove efforts to increase supply chain flexibility,tion extending outside the company walls. CPG companies while other initiatives were aimed at reducing costs andnow have the technological platforms, the tools, and the improving working-capital management.digital touchpoints to converse with consumers in real timeand engage them in the creation and evolution of products These types of supply chain innovations protect manu-and services. As a result, companies have access to the data facturers’ current advantages, but they do little tothey need to not only anticipate but also to influence and enhance management of a company’s demand chain or todrive demand. (See “Catching up to consumers in the age of strengthen integration between the demand and supplydemand,” earlier in this section.) chains. In isolation, supply chain initiatives struggle to help companies maximize value creation—which is essen-CPG supply chains have been finely tuned and automated to tial for profitable growth.produce and distribute products at the lowest possible cost.Now companies need multiple supply chains, with low-cost For these reasons, CPG companies can no longerproduction and distribution at one end, customization and consider their supply chains as a primary source ofpick-and-pack at the other, and hybrids in between—all sustained competitive advantage and profitable growth.delivering unique value propositions to customers at accept- Companies that shift their focus to strengthening theirable cost and service levels. demand chains—by understanding how demand is created, how consumers make purchase choices, andThis new focus on the demand chain does not relegate the how to influence buying decisions—stand the bestsupply chain to the background. Instead, it shines a spot- chance of pulling ahead of their rivals, and stayinglight directly on the front end of the value chain. Will the there. (See “Play-to-win innovations: Disrupting thebrand fulfill its promises to consumers? Only those compa- demand chain,” later in this section.)nies with fast, nimble, yet cost-effective supply chains willbe able to answer in the affirmative.29 Section 1: Enabling the demand chain
  • 34. Are your demand and supply chains in synch?The new imperative: speed, flexibility, alignment, and integration“The better you read what the customer wants, the more What does this mean for a CPG company?efficient you can be at meeting those needs at the rightprice points and in the right packaging,” explains Sunny For the demand chain, it means continually monitoringDelight’s Bill Schumacher. “The demand chains that consumers’ needs and preferences, detecting trends, andwill be successful in the future will have supply chains identifying new opportunities. And for the supply chain,attached to them that can deliver on cost, as in the past, it means the ability to quickly respond to changes inbut also deliver on flexibility. The companies that figure consumer demand and execute cost-effectively. Supplierout how to optimize both will win the game.” arrangements must be in place to quickly provide required ingredients and packaging. Flexible manufacturing processes and capabilities must allow the company toBuilding in flexibility to tailor and quickly adapt and produce product. And the company’scustomize distribution capabilities and customer relationships must accelerate new products to market faster than before.Over the past decade, many CPG companies have developedmore agile and responsive supply chains. These efforts As Coca-Cola’s Duane Still explains, “For years, productionhave been undertaken in response to retailers’ demands for technologies remained the same in the beverage industry.less inventory, fewer stock-outs, and more efficient replen- Now we are engineering a lot more flexibility into ourishment of inventory, as well as the companies’ desire to supply chain so we can change packages, change products,protect valuable shelf space and ensure on-shelf availability. change formulations, and produce packages or formulas that have not yet been developed.”In 1992, a GMA study identified 104 days of dry goodsinventory in the CPG supply chain.28 This was one of the “We have to be careful not to over-engineer, though,factors that spurred Efficient Consumer Response (ECR), and drive up our costs to an unsustainable level,” Stillan industry-wide initiative to develop a consumer-driven continues. “That’s the challenge. Build the flexibility forsupply system. ECR’s basic tenets were timely, accurate, the future, but build it at a cost that we can actually affordpaperless information flow and smooth, continual product today and tomorrow.”flow matched to consumption.While ECR moved the industry forward, it did not live Maximizing sales by betterup to its potential. Information flow was one of the most understanding consumer demanddaunting challenges—specifically the timely availabilityand sharing of information among trading partners. What Given the generally recognized 5% to 10% out-of-stock posi-is different today? Technology has advanced tremendously. tion at retail (depending on the category) and the still-highInformation is pervasive. Deeper analytical capabilities levels of inventory in the extended supply chain, under-exist. Collaboration has improved. And the extended supply standing and forecasting consumer demand is challengingchain is much more integrated. Today, companies are much for many CPG companies. Gaining access to retailers’ point-better positioned to capitalize on the basic tenets of ECR of-sale data has helped, but many companies have not yetand achieve the promise of a flexible, responsive, and cost- mastered how to effectively mine this data, improve theireffective value chain focused on the consumer. forecast accuracy, share information, and effect appropriate responses throughout their supply chains. 2012 Financial Performance Report30 Profitable Growth: Driving the Demand Chain
  • 35. Are your demand and supply chains in synch? The new imperative: speed, flexibility, alignment, and integrationTo compound the problem, retailers are asking suppliers to Chasing accelerated speed to shelftake responsibility for their products’ in-stock positions atthe retail shelf in individual stores. This request has cata- The concept of “speed to shelf” is not yet ingrained in thelyzed companies to try to gauge demand at a much more CPG industry. The traditional CPG supply chain requiresgranular level than was possible in the past, using the 60 to 90 days to put a new product on the shelf. The retailertraditional measurement methods of shipments or retailer has to agree to carry the product, UPC codes have to bewarehouse withdrawals. assigned, the product has to be added to the retailer’s infor- mation system, and on and on.New demand-sensing capabilities are the result. ManyCPG companies are developing processes and capabili- At that rate, CPG manufacturers will not be able toties to leverage new technologies for improving forecast respond effectively to the insights they can gain, almostaccuracy (deeper analytics, better math) with the goal of hour by hour, from direct-to-consumer and social mediaimproving in-stock availability at the retail shelf. channels (see “Is the time right to invest in a direct-to- consumer channel?” in Section 2). Furthermore, theyEqually important, they are building supporting IT capa- will be perpetually playing catch-up with omnichannelbilities to ensure synchronization across the extended consumers, whose expectations of availability have beensupply chain, rapidly identifying the implications from set high by online retailers.the improved forecast and then identifying and sharingthe required changes both internally and with suppliers Getting products into consumers’ hands more quicklyand customers. would help companies “ride the wave” of consumer interest, which can be considerably amplified throughImproving the demand signal has multiple benefits. Early digital channels (see Section 2, “New paths for thereads of demand changes can be shared throughout the shopping journey”). Eager consumers now have manysupply chain for improved inventory management and touchpoints for providing feedback on products (e.g.,deployment, production planning and scheduling, and new flavors or package sizes), and manufacturers candistribution operations. harness this creativity and loyalty to significantly extend product lifecycles.Feeding the news of shifting demand to suppliers will notonly improve availability of materials and ingredients but CPG companies can gain these benefits by aiming foralso allow suppliers to become more cost- and service-effi- accelerated speed to shelf. To achieve that goal, they willcient at meeting the needs of manufacturers. The demand need new processes and routes to market (e.g., new chan-signal can also be used to manage commodity volatility and nels) as well as potentially more “feet on the street.”inform the testing of new products, ideas, and services. They also will need far closer coordination between theAs ConAgra’s John Gehring explains, “One area of demand and supply chains. For example, once- or twice-opportunity for us is to get a more accurate demand daily reads of what is selling (point-of-sale data) could besignal, which will make us more efficient downstream fed into the allocation and replenishment system instan-with our supply chain. If you can’t predict your demand taneously. While it may not be cost-effective to ship whatsignal very well, it’s hard to maximize efficiencies with has sold today to each store tomorrow, vendor managedsuppliers. And there are all kinds of places in the supply inventory (VMI) and other approaches are available tochain where you can drive efficiencies if you have a more automatically release shipments to retailers/stores.accurate demand signal.”31 Section 1: Enabling the demand chain
  • 36. Are your demand and supply chains in synch?The new imperative: speed, flexibility, alignment, and integrationThe trigger for shipment is often a specified threshold Strengthening the integration betweenvolume or the day of the week that allows products to be the demand and supply chainson the shelf by the weekend (peak selling days). To opera-tionalize this response time, close collaboration between Awash in consumer data, CPG companies and retailers mustthe CPG manufacturer and retailer is critical. tie their demand and supply chains together more closely than has been the traditional norm. For this purpose,The quick response (QR) approach used in the fashion retail companies will have to resist the temptation to focus theirindustry provides a glimpse into a similar level of collabo- improvement efforts on one function or another—such asration. Fashion suppliers and retailers gather and analyze by tweaking their sales strategy, reducing procurementpoint-of-sale and consumer preference data in real time. costs, or reinventing their marketing approach. Instead,These early reads of the data (typically daily, at times twice they will need to think holistically about their value chain.a day) reveal preference and purchase patterns for product In particular, they will have to decide how their functionalfeatures such as garment style, size, and color. Based areas will collaborate not only with each other but also withon that information, suppliers and retailers adjust their external partners and, increasingly, with consumers.procurement, allocation, and retail layout strategies. Theyalso pass the data along to fashion design teams and brand This is why we are seeing a renewed emphasis on sales,managers as input into future product development efforts. inventory, and operations planning (SI&OP). Many CPGRetail replenishment typically occurs between 2 days (if companies are re-examining their current SI&OP processthe product is in inventory) and 14 days (if more needs to be to capture new sources of consumer insight and demand onproduced). The result? Savvy, end-to-end management of the front end. They are collaborating more closely with theirthe fashion industry’s entire consumer-centric value chain, key retail partners as well as communicating consumers’with the goal of maximizing sell-through and profits and changing needs more quickly to the supply chain on thereducing markdowns. back end.Building systems similar to QR would require CPG compa- In today’s environment, an effective SI&OP process thatnies to drive decisions based on the mining of immense brings demand and supply together is essential to effec-volumes of data (e.g., from social media, point-of-sale, and tively compete. CPG companies are also focused on iden-loyalty cards). Further, the industry would need to evolve tifying and integrating the most relevant informationaway from its traditional insularity to take advantage of from their trading partners (point-of-sale data), from newoutside capabilities (e.g., through open or reverse innova- internal (demand-sensing) capabilities, and from consumertion; see “Play-to-win innovations: Disrupting the demand insights (social media).chain,” later in this section). 2012 Financial Performance Report32 Profitable Growth: Driving the Demand Chain
  • 37. Are your demand and supply chains in synch? The new imperative: speed, flexibility, alignment, and integrationMany CPG companies have shifted IT resources from the Aligned for growthtraditional supply chain and back office accounting func-tions and dedicated them instead to garnering consumer Successful CPG companies will ensure their strategiesinsights and improving information flow and collaboration and operations are aligned with customers (retailers,between the demand and supply chains. Others are exam- the predominant avenue to the consumer) and also withining their traditional organization constructs and interac- consumers and their preferences/needs. Most importantly,tions, with the goal of ensuring that all relevant functions successful companies will assertively incorporate timelyhave access to up-to-date information and are working consumer insights into their growth strategy.together in harmony. The consumer is king. Consumer preferences and insightsThe solution is not necessarily reorganization of the should be the center of any CPG growth strategy, influ-company and of reporting relationships. Instead, what is encing all functions and driving change. Operationalneeded is close and timely collaboration among historically excellence today is a given. Anticipating and deliveringseparate functional silos. For example, many companies do on emerging customer needs is the differentiator, and willnot include the sales function in the SI&OP process. When drive the bottom line.the question is raised as to why sales isn’t at the table, toooften the response is, “Good question!”Supply chain functions are typically well integrated andwork closely together. In contrast, at many companies,integration is less well established among marketing (whichdrives the interaction with the consumer), sales (whichdrives the interaction with the customer), R&D (whichdevelops new products), and consumer insights (whichfeeds information to everyone).Functional leaders who are able and willing to foster collab-oration and integration as well as to break down functionalsilos are a necessity to keep the supply chain in synch with adigitally enabled demand chain.33 Section 1: Enabling the demand chain
  • 38. Play-to-win innovations: Disrupting the demand chain How you innovate determines what you innovateThe demand chain has become a sandbox for commercially The limits of incremental innovationssignificant innovations. Look at how yogurt maker Chobanihas exploded onto the US stage. Enough conventional In many companies, innovation has been reduced to ayogurt consumers have switched to high-protein, tangy series of small, incremental changes to existing productsGreek yogurt to drive the market from $60 million five and services—a product feature is added, a more reli-years ago to a projected $1.5 billion this year.29 able supplier is found, or costs are lowered by 5%. Minor changes like these help maintain share and margins ofOr consider coconut water, a fledgling sports drink category existing offerings. This focus on technological and supplythat has doubled in revenues in the United States every chain innovation (on the right side in Exhibit 24) hasyear since 2005. With soda sales shrinking, players in this certainly spurred growth over the past few decades, andmarket are jockeying for control of nutritional drinks that molded companies’ business units into profitable enginescould dominate in the country’s $100 billion market for of reliable, repeatable production. The problem is, growthnonalcoholic beverages.30 from incremental technology improvements has plateaued. Companies can no longer attain substantial rates of growthWinning demand chain innovations are not created by luck. or profit by tweaking the status quo. Indeed, many marketsCompanies need a strategy and an operating model geared have entered a competitive churn in which companiesto the right types of innovation. almost instantaneously match each other’s incremental innovations. The net result is little, if any, growth from incremental innovation.Exhibit 24Engines of corporate innovation Business model innovation Technology innovation Value proposition (what) Products/services • Bundle/unbundle • Improve performance • Help customers better and features leverage assets • Change packaging or • Change scale raw ingredients • Leverage the brand Value network (how) Process technologies Demand • Reposition in ecosystem • Cut manufacturing and Supply • Partner assembly costs chain Customer chain • Change how value • Improve service of delivery innovation is monetized insight innovation Target customer (to whom) Enabling technologies • Find unserved customers • Improve information systems • Change how value • Logistics/inventory is communicated • Serve non-customers Source: Adapted from Tony Davila, Marc Epstein, and Robert Shelton, Making Innovation Work, Wharton School Publishing (2006). Many of the concepts in this chapter are drawn from that publication. 2012 Financial Performance Report34 Profitable Growth: Driving the Demand Chain
  • 39. Play-to-win innovations: Disrupting the demand chain How you innovate determines what you innovateIn search of changes that could create new streams of growth Apple boldly addressed these questions, then created aon a sustainable basis, many companies are innovating their massively attractive consumer experience, revitalizing itsdemand chain, and particularly their business models. consumer retail operations and setting a new revenue-per- square-foot benchmark for retail. Shaking up the business model also inspired Amazon, a service company, to offer itsShake up the business model first own-brand product: the Kindle e-book reader.Business model innovation is focused in three areas: Likewise, McCormick changed its product line and• What value is offered marketing to focus on home cooks, which comprised 60% of sales, and offset weakness in restaurant demand.33 And• How that value is delivered and captured (monetized) P&G broke from long-established demand chain concepts by extending its billion-dollar Mr. Clean and Tide brands into• The target customers to whom value is delivered, and services such as car washing34 and dry cleaning.35 how that value is communicatedBy delivering more value in new ways, companies are Yet another shake-up strategy is to rethink how value isstarting to reap higher growth and to bedevil competitors communicated. Gatorade’s “Win From Within” campaign,scrambling to follow suit. Consider, for example, the 46 for example, opens a dialog with teenagers about the role ofmillion Americans living at or near the poverty line.31 By nutrition in sports performance, with a goal of getting the attention of 23 million US teens.36redesigning their business models, some companies arefinding the bottom of the US economic pyramid to be alucrative source of growth. The challenge: Inject an experimental mindsetRoss Stores, the California-based operator of the Ross Dressfor Less off-price department store chain, has had success Demand chain innovation is relatively new, but there aretaking over foreclosed stores in blighted areas for pennies a few basic rules for success. First and most important:on the dollar and then reopening them under its dd’s How you innovate determines what you innovate. That isDiscounts brand. Even Walmart, long known for its focus because innovation is a process-dependent approach toon rural America, is moving into inner cities, expanding its creating growth.grocery offerings, and offering basic medical care.32 Currently, most companies rely on traditional R&DThe principal discipline of any demand chain innovation is processes designed to protect share and hold margins inconsumer insight—a willingness to look at consumers in a existing markets. These play-not-to-lose processes are bril-new light. As Bert Alfonso of Hershey notes, “What you find liant for incremental supply chain improvements, but haveis that insights into consumers—both for current portfolio been largely incapable of producing breakthrough innova-and, in some cases even more importantly, for innovation— tions in the demand chain.is just the new norm.” The pivotal moment occurs whencompanies ask and answer these questions: For that purpose, companies must add new operating• Which segments do we underserve or not serve at all? models geared to discovering winning innovations and making them commercially successful.• What is critical in what we currently offer consumers, and how can we better deliver on the brand promise?• How can we offer value in a different or better way?35 Section 1: Enabling the demand chain
  • 40. Play-to-win innovations: Disrupting the demand chainHow you innovate determines what you innovateLeaders in demand chain innovation are adding play-to- • Incubators. Incubators operate like small, lean start-win entrepreneurial elements to their traditional R&D ups nestled inside the company. They are staffed byoperating models (see Exhibit 25). All of the innovation intrapreneurs—a special breed of innovators who haveapproaches described below inject an entrepreneurial an entrepreneurial spirit and capabilities but can alsomindset and add a healthy dollop of breakthroughs to the leverage corporate strengths. Incubators use proto-portfolio. typing to test new business models and technologies, and learn which ones are winners. They experiment at a clock speed that is four to ten times faster than tradi-Exhibit 25 tional R&D.Innovation approaches • Open innovation. Open innovation breaks from traditional approaches by including outsiders in the innovation process. For significantly lower costs than Corporate traditional R&D, open innovation puts a billion IQ venturing points in play for any company that can figure out how Open to collaborate effectively and find the right people. “We Incubators innovation look in many places where you wouldn’t necessarily go for food ideas,” says ConAgra’s John Gehring. “It doesn’t have to be invented here and, in fact, if we spend too much time focusing on things that are invented here, Traditional we’re going to be fairly slow in terms of innovation.” General Mills’ Don Mulligan adds, “This willingness Co-creation R&D for core Design to look externally has permeated the organization. We are much more open to external partnerships, external advice, and external perspective than we would have been ten years ago. We are creating extended virtual organizations that let us tap into resources much more quickly, more fully, and less expensively than in the Frugal Reverse past.” Those external partnerships can extend to joint innovation innovation ventures in noncompetitive spaces with competitors. Clorox CFO Steve Robb provides an example: “Our Source: PwC. 2012 Financial Performance Report36 Profitable Growth: Driving the Demand Chain
  • 41. Play-to-win innovations: Disrupting the demand chain How you innovate determines what you innovate partnership with Procter & Gamble has enabled us • Corporate venture capital. Corporate venture capital to leverage technology they’ve used in their diaper captures companies in early stages of development business and apply it in our trash bags to make them to inject their intellectual property into the investing stronger and more elastic. It’s good for the environ- company. This is particularly effective for quickly ment, because we use less resin, and it’s good for building expertise in new areas in which the target consumers, because they get a better bag.” companies have a head start. To support external outreach, companies are rushing Two other play-to-win approaches—reverse innovation to launch open portals, such as General Mills’ G-WIN and frugal innovation—are driven by a “less is more” Digital. This portal solicits ideas for games and mobile philosophy advocating simple, rugged, and maintenance- apps for any of the GM brands. As General Mills Chief friendly products. Instead of stripping down existing Marketing Officer Mark Addicks explains, “We have Western products to meet the needs of developing econo- these iconic brands and we have consumers that are mies, reverse innovators start with a clean sheet in the way ahead of virtually every company in terms of how target country. they’re thinking and using technology. We want to run as fast as we can behind them.”37 • Reverse innovation. Reverse innovators start with “in country, for country” ideas focused on meeting local• Co-creation. Co-creation goes a step further than needs in less-developed countries (e.g., a heart monitor open innovation. Customers are formally included that does not require specialized training to use). When on the innovation teams, putting them at the crux of that hurdle is crossed, they move on to the “in country, the creative process. Directly involving the customer for the world” phase, adapting and scaling products for in the innovation process—rather than just getting global use.38 their opinion or observing them—creates positive new insights and creative dynamics. The direct involve- • Frugal innovation. Though not tied to a specific geog- ment stimulates new thinking and decidedly different raphy, frugal innovation is also energized by constraint. outcomes than traditional R&D. Google recognized the value of this approach years ago, making “creativity loves constraint” its eighth innovation• Design thinking. Design thinking approaches innova- principle.39 As Marissa Mayer, Google’s vice president of tion problems in a manner similar to that employed location and local services, once said, “Engineers thrive by cultural anthropologists or ethnographers. Insight on constraints. They love to think their way out of that is gained from careful observation of what users do little box: ‘We know you said it was impossible, but we’re when they engage a product or service. Like incubators, going to do this, this, and that to get us there.’ ” 40 design thinking approaches use rapid prototyping to drive exploration and development.37 Section 1: Enabling the demand chain
  • 42. Play-to-win innovations: Disrupting the demand chainHow you innovate determines what you innovateBuild the capability to drive To build an innovation culture for the demand chain, CPGhigh-growth innovation companies must define the goals of that innovation and the business implications of their choices. Then they needWhile the supply chain has a rich history of innovation to to instill the understanding that true creativity requiresmine, there are no prescriptive, well-tested approaches forgetfulness and fresh eyes—otherwise, companies willto innovating business models. Companies are just now try to solve new problems using old solutions.developing the capabilities to transform their demandchains to produce a reliable stream of improved value, as Like cultural anthropologists, companies need to lookwell as new ways to deliver that value. at how their brand manifests itself in the market, and then tear down assumptions that blinker their viewGenerating breakthroughs and substantive growth from of a brand’s possibilities. At the same time, they mustthe demand chain requires new capabilities in three areas: remove the barriers raised by “not the way we do things”building culture, collaborating across boundaries, and protectionism.enabling innovation (see Exhibit 26).Exhibit 26Three types of capabilities required for demand chain innovation Build innovation culture • Define demand chain’s innovation goals and business implications • Overcome “not the way we do things” mindset • Create a culture of business model experimentation Collaborate across business boundaries Enable innovation • Manage innovation across the organizational • Define missing assets needed for innovation elements responsible for demand chain • Build capabilities required, and put necessary • Find and establish relevant Mindsets processes in place partners in the demand chain network and culture • Select ways to measure and reward demand chain innovation Demand chain innovation Business Processes boundaries and capabilities Source: PwC. 2012 Financial Performance Report38 Profitable Growth: Driving the Demand Chain
  • 43. Play-to-win innovations: Disrupting the demand chain How you innovate determines what you innovateBringing the right people to the table requires reaching • Stage 2: Integrated. This is an important transitionalacross business boundaries that have traditionally been phase. Companies learn from their initial functionalrigid and, at times, impermeable. Companies need strate- efforts and identify what else is needed to drive moregies and processes for not only integrating siloed internal and better demand chain innovations. They ramp up,resources, but also for building collaborative networks adding more capabilities and spreading best practicesof partners, thought leaders, brand ambassadors, and that foster higher levels of performance. Demand chainsuppliers. innovation becomes integral to their way of thinking and acting—but there is still room for growth.Finally, CPG companies must build or gain access to the • Stage 3: Orchestrating. At this level, all the componentscapabilities required to get the job done. A good starting are working together and companies begin to orchestratepoint would be asking, What are we missing to deliver a more complex and effective breakthrough innovation.new value proposition? Do we have the creativity required Companies have built their capabilities, defined theirto shake things up? Or the engineering and technical partners and established world-class collaboration, andhorsepower? mastered business model innovation. In addition, they’ve built the platforms and processes required to gather,Demand chain innovation key performance indicators glean, and act on consumer insights. By this point, they(KPIs) and incentives also fall under the capabilities are capable of creating exceptional value and disruptingumbrella. Without these, people will either resist change markets.or will snap back to old habits if they think no one islooking. For example, building strong partnerships in thedemand chain network makes sense, but getting people In search of the next big thing—forcomfortable with collaboration outside of the company customersrequires significant changes. In successful companies, KPIsmake partnering a very clear priority and define how to In today’s CPG world, the formula for growth requiresbecome a partner of choice in the ecosystem. The incen- insights and commercial introductions that are bold andtives help people adopt new collaborative behaviors and valuable. Supply chain innovation has been the sourceovercome the fear of change. of growth over the past decade, and companies can still achieve incremental growth by innovations such asCompanies committed to demand chain innovation typi- reducing packaging waste and improving logistics.cally move through three stages of operational maturity:• Stage 1: Functional. Companies add basic capabilities But remaining focused on supply chain is not enough. to generate ideas and gather consumer insights that Recent experience makes it clear: Embracing innovation in catalyze new types of innovation. They break down the demand chain provides the breakthroughs that drive silos, and they start to reach outside company walls for significant growth. New approaches—such as incubation, inspiration and executional support that will produce co-creation, and reverse innovation—are opening up new breakthroughs. In addition, companies begin to look possibilities to create value and deliver and monetize it in across the entire demand chain to identify opportu- new ways. nities for innovation and growth. They put in place metrics and motivators that support new behaviors. Shaking up business models not only produces revenue and And most importantly, they shift their mindset and margin growth, but also excites customers and differenti- operating stance to allow breakthrough innovations ates companies from their competitors. In the current global to occur in the demand chain. marketplace, disruptive innovation—the next big thing— will spring only from demand chain innovation.39 Section 1: Enabling the demand chain
  • 44. Section 2 New paths for the shopping journey There’s a channel explosion going on, as consumers are researching and buying products through many avenues online. To capture consumers’ hearts and minds as well as their feet and fingers, CPG companies will need to get smarter and more personalized in their digital engagement with and delivery to consumers. Building a digital direct-to-consumer channel, for instance, can enable real-time conversations with consumers. But some brands and some consumer segments are better suited than others to a direct channel, and companies will have to be ready to mine customer feedback and evolve products to fit the preferences of their target segments. Consumers’ hearts can also be won by helping them determine which offerings and brands are truly sustainable and therefore worth choosing. Forward-looking businesses are finding new ways to engage consumers on the subject of sustainability and to incorporate reputation management tightly into their brand management efforts—all while keeping their eye on the profitability of sustainable practices. 2012 Financial Performance Report40 Profitable Growth: Driving the Demand Chain
  • 45. Getting smarter about digital engagement Capturing the hearts, minds, feet, and fingers of consumersThe rapid adoption of social media, smartphones, and Be where your customers aretablets means consumers are researching, comparing, andbuying products across multiple, evolving, and even blur- Consumers are driving and shaping the adoption ofring channels. It’s an evolution of the shopping journey omnichannel shopping.43 On this journey, the path tothat gives manufacturers the opportunity to converse with purchase has grown increasingly complex and nonlinear.44consumers, amplify their brand messages across digital According to a recent PwC survey, 86% of shoppers usetouchpoints, and directly influence the buying process. at least two channels as they research, shop, and interact with brands, while 25% use four or five.45 Additionally,Orabrush embraced this opportunity to drive consumer 40% said they value the option to bounce across channelsawareness of its obscure $5 tongue scraper by creating (web, mobile, in-store).46zany online videos (including a parody of the iPad 2introduction video and personalized appeals to Walmart Being where your customers are requires companiesbuyers) that have attracted over 39 million views on the to adopt an integrated view of the consumer across allcompany’s YouTube channel. This direct digital touch channels rather than a siloed, channel-specific customerdrove up brand awareness and created enough pull to contact model that gives priority to business and productpersuade Walmart to distribute the device nationwide in goals. By adopting a model that puts the consumer view atits stores.41 the center of sales, marketing, and service activities (i.e., the demand chain), manufacturers can address the needsTraditionally, only more established brands could afford of consumers in the channel of their choice, effectivelythe level of investment required to get distribution through increasing relevance and profitability.third-party retailers such as Walmart. Today, though,emerging brands that are digitally savvy and know how to To do that, CPG companies need to map their demandinfluence the consumer’s journey are able to compete with chains to the new paths of the consumer shopping journey,larger, more established brands to win channel mindshare engaging those consumers where the brand messagesand secure scarce shelf space. and interactions are relevant and welcome (see Exhibit 27, page 42). They need to deliver a compelling and consistentThe playing field is rapidly shifting as brands large and brand experience at every touchpoint in every channel thesmall seek to participate in every single transaction with consumers are using, especially given the evolving roles ofconsumers across all channels. For example, Unilever has the channels in the shopping journey. For example, whileannounced plans to make the mobile space its primary social media was once limited to generating brand aware-marketing channel, and is willing to cover some mobile ness, it is now also recognized as a shopping destination.data charges for customers interacting with its brands.42 To deliver that compelling brand experience, three-quartersTo stay relevant to consumers, CPG companies must of CPG companies expect to leverage social media for brandrethink their demand chains to drive awareness, conver- promotion over the next 12 months, and nearly a third (upsion, and loyalty across all channels. They must be on the from 17% last year) will engage in the social media conver-digital platforms that their customers prefer so they can sation as an avenue for increasing consumer loyalty.47influence the buying process directly, and they must alsobe ready to adapt as digital touchpoints evolve. In order todrive business results in the evolving landscape, compa-nies must also develop metrics with which to measure theeffectiveness of their digital efforts.41 Section 2: New paths for the shopping journey
  • 46. Getting smarter about digital engagementCapturing the hearts, minds, feet, and fingers of consumersExhibit 27Mapping the manufacturer’s perspective to the consumer shopping journey Brand awareness Brand Brand conversion and activation ambassador support Service/ Research Compare Trial Purchase support traditional channels Physical x x x x x store Established and Catalog/ x x x x x phone Corporate x x x website Etailers x x x x x PC, tablet, mobile digital channels Social media x x x x x Emerging Direct-to- x x x x x consumer salesSource: PwC.Generate brand awareness Brands are also employing cross-platform initiatives to align with consumers’ ease in bouncing across channels.Digitally savvy brands are capturing the minds of A mobile app for Unilever’s Lynx Stream deodorant letsconsumers by establishing touchpoints to engage in the young men who use this brand upload pictures of theirtargeted two-way dialog and content sharing—a shift nights out to their social networks.49 And to drive follow-away from one-way, broad-brush push marketing, which up and in-store purchases, brands like General Mills useoften requires significant marketing investment. Groupon to promote trial packs at a discount.50Social networks are enabling this dialog between brand “There are a multitude of channels now, some more attrac-and consumer. Facebook fan counts for brands such as tive than others,” says Sunny Delight’s Bill Schumacher.Starbucks or Coca-Cola, for example, are 10 to 100 times “Part of our strategy going forward is to ask, how do wehigher than unique visitor counts on the company’s corpo- engage the consumer by recognizing the occasions, gettingrate websites.48 the right package to match that occasion at a price point 2012 Financial Performance Report42 Profitable Growth: Driving the Demand Chain
  • 47. Getting smarter about digital engagement Capturing the hearts, minds, feet, and fingers of consumersthat makes sense for the consumer, and how do we find In fact, a recent comScore report on millennials, a segmentthe channels to deliver that? How do we match up the with an estimated $170 billion in annual purchasingchannels with that package and occasion?” power, emphasizes the role of user-generated content in influencing the purchasing decisions of younger genera-Win brand conversion tions.55 According to the study, 84% of millennials take content posted by strangers into account when purchasing,CPG manufacturers have long relied on retailers to win and 50% value this input more than input from friendsconsumers’ foot traffic and close sales. Now they need to and family.capture consumers’ fingers, too, if they are going to protecttheir market share. This new ease of influence allows CPG companies to employ more grassroots-targeted campaigns. On the otherIn the United States, online CPG sales are expected to hand, it also requires that they closely monitor socialjump from $12 billion in 2012 to $25 billion in 2014.51 To media channels for wildfires of negative commentary.capture a slice of this fast-growing market, manufacturersare aggressively pursuing a variety of forms of direct-to- “It’s like road rage in a car,” explains Al Williams of Bushconsumer e-commerce. Brothers. “People get bold on a computer and post things more damaging than they would say on the phone, with lessHeinz successfully generated marketing buzz and trial conversational context.”for its “limited edition” balsamic tomato ketchup, whichwas made available only through Facebook two months Customer service has always been a critical factor inbefore appearing on supermarket shelves.52 The promo- building (or eroding) brand loyalty. Today, a digitallytion was not advertised, though an executive mentioned enabled demand chain provides many more touchpoints forthe promotion in a newspaper article. The social media forging loyalty and building community. By placing productbuzz following the story added 35,000 new friends to the on the periphery and focusing on consumer choices andHeinz Facebook page in less than three weeks.53 So far, lifestyles, for example, General Mills successfully targetedhowever, companies have been having mixed success with Hispanic mothers through the website QueRicaVida.com.56full-fledged f-commerce (e-commerce on Facebook). Asone analyst explained recently, “It was like trying to sell Open innovation (see “Play-to-win innovations: Disruptingstuff to people while they’re hanging out with their friends the demand chain,” in Section 1) is another powerfulat the bar.”54 option for CPG companies to connect with consumers and create brand ambassadors. Bringing consumers “insideThe key for CPG companies is to use test-and-learn cycles the circle” and allowing their ideas to drive new develop-based on a defined digital strategy (see “Is the time right ment fully engages their hearts and minds in the success ofto invest in a direct-to-consumer channel?” later in this those initiatives.section) rather than throwing random ideas against thewall to see what sticks. Digitally enable your demand chainProvide brand ambassador support Being where the consumers are in digital channels is fastGiven the multiplier effect of social media, it is even more becoming table stakes for CPG companies. Few question theimportant to establish customer intimacy and develop inevitability of this digital transformation, but the chal-a loyal and vocal consumer base. After all, with a single lenge lies in preparing the organization and putting thedigital posting, a consumer can influence thousands, if not processes, tools, training, and governance in place quicklymillions, of people. enough. Manufacturers should consider the following guiding principles as they seek to maintain relevance in this omnichannel environment.43 Section 2: New paths for the shopping journey
  • 48. 44
  • 49. Getting smarter about digital engagement Capturing the hearts, minds, feet, and fingers of consumersBe clear about your objective and Traditionally, customer service was relegated to theengage deliberately channel, the owner of the consumer relationship. Today, though, brands are in a position to have direct ownershipWhile digitally enabling the demand chain transforms and must understand their obligation to the consumer. Tothe way that brands interact with consumers, the basic do this, they must be responsive on any channel that thebusiness goals remain unchanged. Therefore, to fully consumer chooses. Manufacturers must scour relevantrealize the business benefits of a digitally enabled sites and blogs to monitor what consumers (and competi-demand chain, a company must establish a digital tors) are saying about the brand, and be in a position tostrategy that is linked to its business strategy and goals. respond quickly and accurately.The company needs to understand the impact on itsbusiness model, figure out how to interact in a compel- Consider the risks and plan accordinglyling fashion with consumers, and consistently meet thoseconsumers’ expectations. While a digitally enabled demand chain can elevate a brand, it can just as easily contribute to its downfall. ForOrganize around the consumer example, a campaign may go viral (the desired outcome) but the organization may not be prepared for the increasedThe ease with which consumers jump between chan- demand, potentially resulting in backlash, consumernels provides a challenge for manufacturers committed fallout, and damage to the brand’s reputation. Beforeto providing a consistent brand experience across these launching an initiative, it is important to understand thechannels. Providing consumers with the right experi- impact on the organization and put in place the supportingence, at the right time, through the right channel requires people, processes, and systems.companies to build a single, unfractured view of theconsumer across touchpoints. To do that, brands need to In addition, the issue of who owns the consumer becomesdevelop the appropriate organizational models to support increasingly relevant as touchpoints cross product lines,all the channels. marketing, sales, and service. To ensure consistency in brand delivery, companies need to consider training andCompanies must also build governance structures that education programs to coach employees in communicatingallow the consumer to be placed at the center of the messages that are consistent with the business and branddemand chain (see “Catching up to consumers in the objectives.age of demand,” in Section 1). To this end, companiesare recruiting heads of digital strategy/social mediato define strategy, direction, and messaging while Digitally transform and gain socialembedding a holistic view of consumer needs across the intelligenceorganization. CPG companies are constantly seeking to develop a deeperExceed consumer expectations and understanding of consumers. For example, they are oftendeepen relationships trying to understand what attitudes and unspoken needs are conveyed by consumer choice. Why do they buy atOmnichannel consumers are growing increasingly this time? Why are they buying via this channel versussavvy and empowered. As their comfort grows, their another? What is their motivation?expectations rise, leading to demands for fasterservice, wider selection, and 24-hour response time for To answer these and other questions, companies havecomplaints posted online.57 In other words, they expect run focus groups, conducted consumer research, anddistinctive, high-touch customer service that keeps pace pored through third-party data. Now, all of a sudden, thewith their wants and needs. information they have long sought is available instantly45 Section 2: New paths for the shopping journey
  • 50. Getting smarter about digital engagementCapturing the hearts, minds, feet, and fingers of consumersthrough digital touchpoints along the shopping journey. By using social media insights to augment the data to whichCompanies may have this information in their possession, they already have access internally, companies are likely tobut they still have to figure out how to mine all the data discover unexpected opportunities. For example, a Northfrom multiple platforms and extract the relevant insights. American apparel maker that wanted to reposition a brand of boots and shoes used third-party social media analyticsCPG companies that learn how to separate the signal from to tease out the signal from thousands of blog entriesthe noise on digital platforms will change the game so fast about the product and focus on key blogging influencers.that their competitors will struggle to keep up. They will Uncovering insights it had not gleaned from its conventionaldevelop the social intelligence to answer the questions research data on its footwear brand, the company discov-they have long asked, and therefore will be able to accu- ered it had been missing an entire market segment. Whilerately predict consumer behavior. its shoes had been designed for industrial markets, bloggers bought the shoes for their fashion appeal and for ruggedTo “read” the signal in social media, companies need to recreational use, including riding all-terrain vehicles off-put processes, tools, and analytics in place to sift through road (Exhibit 28).58all the unstructured and semi-structured data created indigital channels—the so-called “big data” (see the sidebar“Big data: Both a competitive imperative and an opportu-nity,” page 28).Exhibit 28Improve the signal-to-noise ratio in social media monitoringSocial media is a high-noise environment But there are ways to reduce the noise And focus on significant conversations work boots Illuminating and helpful dialogue leather heel heel boots color fashion color fashion construction safety style style rugged leather cool leather cool shoes toe shoes toe boots boots price safety price safety store value store value rugged rugged wear wear construction constructionAn initial set of relevant terms is used to cut With proper guidance, machines can do Visualization tools present “lexical maps” toback on the noise dramatically, a first step millions of correlations, clustering words by help the enterprise unearth instances oftoward uncovering useful conversations. context and meaning. useful customer dialog.Source: Nexalogy Environics and PwC, 2012. 2012 Financial Performance Report46 Profitable Growth: Driving the Demand Chain
  • 51. Getting smarter about digital engagement Capturing the hearts, minds, feet, and fingers of consumersAdding social intelligence to traditional business intelligence processes producesbetter, more robust results. By expanding on the consumer insight process andrunning focus groups near the end of the cycle (after the social media analysis),the North American apparel maker was able to validate its newly gleaned marketsegment insights and successfully reposition itself (see Exhibit 29).Exhibit 29Adding social media techniques to business intelligence (BI) processes One apparel maker started with its conventional BI analysis cycle Conventional BI techniques 1 1. Develop questions used by an apparel 2. Collect data company client ignored 5 2 3. Clean data social media and required lots of data cleansing. The 4. Analyze data results often lacked insight. 5. Present results 4 3 Then it added social media and targeted focus groups to the mix The company’s revised approach 1. Develop questions 1 added several new elements 2. Refine conventional BI (including social media) and 6 2 - Collect data expanded others, but kept the - Clean data focus group phase near the - Analyze data beginning of the cycle. From social 3. Conduct focus groups media conversations, the company 5 3 (retailers and end users) was able to mine new insights 4 4. Select conversations about market segments that it hadn’t thought to target before. 5. Analyze social media 6. Present results Then it tuned the process for maximum impact The company’s current 1. Develop questions 1 approach places focus 2. Refine conventional BI groups near the end, where 7 2 - Collect data they can inform new - Clean data questions more directly. This - Analyze data approach also stresses how 6 3 3. Select conversations the results get presented to 4. Analyze social media executive leadership. 5 4 5. Present results 6. Tailor results to audience 7. Conduct focus groups New step added (retailers and end users) Source: PwC.47 Section 2: New paths for the shopping journey
  • 52. Getting smarter about digital engagementCapturing the hearts, minds, feet, and fingers of consumersMeasure effectiveness and drive Common metrics in the digital space (for instance,business performance number of visitors or pageviews) may be helpful guides. These dashboards of digital performance, however,As CPG companies begin digitally transforming their are irrelevant if the metrics they track do not tie to thedemand chains, they should consider evolving their broader brand goals (irrespective of medium) and to theapproaches to measuring effectiveness across the underlying business economics.multiple touchpoints. While digital channels may beamong the most directly measurable mediums available, “The ability to get more granular with digital, down tocompanies are still in the early stages of figuring out the individual consumer, is the real upside,” says Donwhat to measure, and how. Mulligan of General Mills. “The exact metrics are still being fully developed, but they have to be founded onChris Davies of Diageo explains: “We have research that the return on investment. That’s still going to be the keyshows that ‘friends’ of brands are more likely to purchase, measure—it’s just a matter of how you measure it as eachand we have research that shows that household panels new avenue to the consumer comes along.”exposed to our Facebook advertising spend more on ourbrands. We are examining ways to isolate the digital To the extent that brands can assess their performance,impact of multifaceted campaigns and considering digital- they will be better positioned to make robust brand/busi-only campaigns to test our measurement tools.” ness decisions and apply their resources more prudently. A digital index (see the sidebar “Building a digital index,”Part of the challenge for other digital investments lies in page 49) enables companies to compare themselves inthe constantly evolving set of metrics that are relevant terms of key online performance indicators.in the digital landscape. Leading indicators of consumerengagement—fans, friends, followers, likes, digs, check- Consumers’ brand of choiceins, mayorships, retweets, reposts, forwards, shout-outs,comments, replies, etc.—may change as popular social To become a brand of choice today, companies must bemedia destinations alter their approaches and new digitally savvy, understanding how, when, and whereentrants emerge. Front-line engagement measures need to consumers are interacting with their products. They mustbe flexible and able to dynamically recognize the changing have a single view of the consumer, and know how toimportance and influence of social behaviors. capitalize on insights across touchpoints. Further, they must recognize the risks that digital missteps present toTraditional demand chain metrics such as brand aware- the brand, and adopt the digital metrics and the just-in-ness, purchase intent, and loyalty will remain relevant time learning mindset required to evolve their strategiesthrough this process. However, understanding the effec- in synch with changing consumer demands.tiveness of the digital demand chain will also be impor-tant as brands seek to apply their limited resources acrossthe channels. 2012 Financial Performance Report48 Profitable Growth: Driving the Demand Chain
  • 53. Getting smarter about digital engagement Capturing the hearts, minds, feet, and fingers of consumers Building a digital index A digital index provides companies with a clear, objective measure of the effectiveness of their digital efforts and how they compare to key competitors. By better understanding the effectiveness of their efforts, companies can make changes to their digital initiatives, exiting those that are not yielding business results and reallocating resources as appropriate. A digital index scores companies on key online performance indicators such as: • Reach. The breadth, depth, and influence of the company’s digital engagement • Business impact. Attributable, quantifiable improvements to enterprise economics and reputation • Innovation. Measure of the company’s influence on breaking new ground for digital enterprises • Digital readiness. The flexibility and scalability of the company’s digital technology platform A core set of KPIs for each category can be identified by combining available data and scoring algorithms (e.g., social media influence, digital IQ, digital readiness) with external leading practices and industry-specific data and measures. Each KPI can be measured and weighted for the company and then benchmarked against leading brands across major industries. Exhibit 30 Achieving an overall digital score Current state score Outlook score Overall score Innovation Current state Reach Business impact Digital readiness Outlook Reach and business impact scores Innovation and digital readiness will Current state and outlook will then will combine to measure current state digital index score + combine to measure outlook digital index score = combine for an overall digital index score Source: PwC.49 Section 2: New paths for the shopping journey
  • 54. Is the time right to invest in a direct-to-consumer channel? Determining the right brand positioning, operating model, technology enablers, and talentDigital commerce is enabling your global brand teams to Digital commerce platforms lower the entry barrier formarket and sell directly to consumers, including direct conversing with and selling directly to consumers. Whilefulfillment. Direct-to-consumer (DTC) sales sets up an CPG companies are testing business models for gettingongoing dialog that is richer, deeper, and more valuable their brands into the pantries, refrigerators, and homes ofthan any channel traditionally available to CPG compa- consumers, so are local brands that no longer need a brick-nies. Purchase behaviors provide very strong signals of and-mortar presence. The playing field is a little moreconsumer needs and preferences, and CPG companies even, and these local brands can now jockey for positionand suppliers have long sought these insights unfiltered with larger companies that are far better financed.by retailer channels. All this activity will disrupt the market, and that disrup-Even interactions at digital touchpoints such as Facebook tion will create new consumer experiences (such asare not as valuable for understanding consumers as direct product subscriptions or automated consumer replenish-purchase behavior data. ment) and potentially allow for entry into new markets with lower costs. The use of DTC over traditional retail“It’s hard to know how many cases of baked beans a brick-and-mortar will present risks to larger players thatFacebook friend is worth,” explains Al Williams of Bush have less nimble, responsive supply chains.Brothers. “We have been successful in getting people to‘like’ us, but we don’t have any way to tell whether the Global CPG brands—from massive multinationals topeople who like us are new customers or whether they regional players—acknowledge they lag other indus-are buying more product than they did before.” tries (such as consumer electronics) in exploring the DTC channel. Everyone is trying hard to figure out aOther factors beyond the lure of direct purchase data are truly winning strategy. The game is open and some earlyalso prompting CPG companies to test or at least consider adopters are already out in the market learning how toDTC channels. Retailers continue to use private labels to win in the digital commerce playing field.drive traffic, basket, and gross margin, for example, leadingnational brands to worry that they have only a single lever(price or promotions or advertising) to play today. How to position brands in the DTC channel?Then, of course, there are the consumers with theirrising expectations: to interact with the brand online, to Before starting to extend a DTC channel, companies mustpurchase products 24-7, and to see their input reflected rationalize which of their brands are the best positionedin product offerings. A number of CPG companies are for the channel. In addition, they must figure out howalready mining new and very specific consumer experi- to leverage their current channels while keeping true toence niches. Candy manufacturer Mars, for instance, their brands as they expand into new and continuallygives online consumers the ability to order customized evolving digital channels.M&Ms in specific colors and with messages printed on thecandy, and have them delivered to their door.59 2012 Financial Performance Report50 Profitable Growth: Driving the Demand Chain
  • 55. Is the time right to invest in a direct-to-consumer channel? Determining the right brand positioning, operating model, technology enablers, and talent“The direct-to-consumer model makes sense from a replen- the number of Amazon links on brand websites. However,ishment standpoint for products that consumers use on a an Amazon presence does not give companies a completeregular basis, like Brita water filters,” says Clorox’s Steve picture of the customer, so many of these companies areRobb. “Small, lighter-weight products with an appropriate building their own DTC channels based on their targetedmargin structure, like Burt’s Bees, also make sense. It’s segments. Relationships with Amazon are evolving andharder to see how the model works for heavier products like will inevitably change further as CPG companies andcharcoal or bleach.” entrepreneurs stand up their own channels. The threat of the digital commerce providers is real, and it’s likelyCoca-Cola’s Duane Stills concurs: “Our business model is all only a matter of time before these companies move intoabout working closely with our valued customers to reach private label competitive brands.their consumers. Our current distribution system providesus with a great deal of flexibility to meet our customers’ Alice.com is an example of an entrepreneurial organi-needs, but we may also test the selling of certain niche zation interested in selling CPG products online. Thisproducts via new channels.” online marketplace features over 6,000 products from approximately 600 CPG companies. The site providesWhether a product is easily customized is also a key consumers with direct-from-manufacturer prices, door-factor in prioritizing brands for launch into a new DTC step delivery, automatic coupons, reordering tools, and achannel. Companies will need to learn quickly how to mobile shopping app.mine customer feedback and evolve products to fit thepreferences of their target segments. Product lifecycles The founders of Alice, however, are not simply providing awill shorten significantly, and there will be a drive channel for CPG products. Their business model includestoward low-cost customizations. These will make test- back-end advertising and selling the insights from the gath-and-learn cycles easier to justify. ered data to manufacturers. It is not yet clear whether this model will be profitable, especially given the mechanics and the required investments involved.Where to sell direct? Another approach to selling direct to consumers is toCompanies select DTC channels based on their target couple valued content for a particular customer segmentsegments. Hindustan Unilever, for example, has successfully with an e-commerce function. Such highly special-used 45,000 entrepreneurs in India to reach approximately ized segmentation is a hallmark of first movers into a135,000 villages across 15 Indian states.60 DTC channel. General Mills is testing this approach with its Gluten Freely site, built in the cloud (see theAmazon is one of the early movers in the DTC channel. sidebar “Quick and sticky: General Mills’ Gluten FreelyMany CPG companies turned to Amazon initially as a e-commerce site,” page 52).way of selling online. Today, this online retailer remainsan important channel for many companies, as shown by51 Section 2: New paths for the shopping journey
  • 56. Is the time right to invest in a direct-to-consumer channel?Determining the right brand positioning, operating model, technologyenablers, and talent Quick and sticky: General Mills’ Gluten To make the science a focal point on the site, General Freely e-commerce site Mills partnered with the University of Maryland Center for Celiac Research, the University of Chicago Celiac General Mills’ Gluten Freely site, launched in mid-2011, Disease Center, and the General Mills Bell Institute of culminates the company’s four-year pursuit of a huge, Health and Nutrition. previously untapped market. Celiac disease, a digestive condition triggered by eating foods containing gluten, “There’s so much more that you need to make a site sticky was virtually unrecognized prior to 2003. Now, the beyond the products themselves,” Mulligan adds. “And National Institutes of Health estimates that 1 in 100 that’s particularly important as gluten-free products have people worldwide have the disease.61 become more readily available in traditional groceries. The site is very much in test mode, but we like what we It took a thousand batches to create a gluten-free version are seeing so far.” of Chex cereal.62 Since then, not only General Mills but also other companies rushing to meet the needs of this By building in the cloud, General Mills was able to bring segment have delivered a steady flow of gluten-free the site to market twice as fast and at half the cost of baking products, cereals, energy bars, and organics. a traditional IT development effort. Further, with this According to a recent Nielsen report, the volume of model, the team can add infrastructure as customer these products sold rose 37% over the past year.63 demand grows rather than taking the costly traditional route of building out servers and systems at the start of Don Mulligan of General Mills says, “We wanted to the project.64 expand our reach from a gluten-free standpoint. What we found was that you really need to bring more than just the products. We’re bringing the community and the education.” 2012 Financial Performance Report52 Profitable Growth: Driving the Demand Chain
  • 57. Is the time right to invest in a direct-to-consumer channel? Determining the right brand positioning, operating model, technology enablers, and talentWhich strategy to employ? Wary of the sizable risk, companies have so far controlled their investments in DTC. Many are taking small stepsCPG companies interested in a DTC channel are searching with a few SKUs, for example, or focusing on buildinghard for the right go-to-market strategy and operating foundational components like data analytics platforms tomodel to employ. Should the organization be separate produce insights based on consumer purchase behavior.from the core, for example? How should the DTC functionleverage or interact with other parts of the business? Who As they would for any new business, companies must goowns the profit-and-loss (P&L) statement? How do we beyond monetary goals and develop strategic goals asdeliver on the last mile to the home? well, based on benchmarks. Building an integrated digital transformation strategy requires an understanding of theCPG companies have well-honed expertise in broadening key components involved (see Exhibit 31).and extending brands. DTC, however, is a transforma-tional business model and, as a result, represents green-field exploration. Different types of innovation will be Exhibit 31required, so even companies adept at product innovation Areas of focus for CPG companies moving into DTCwill be stepping into new areas of the consumer experi-ence and the last mile delivery to the home.These new business models are being defined in a disrup- Core contenttive environment in which technology platforms, tools, management Analyticsand consumer experience are rapidly evolving. There areno mature examples showing how DTC affects a compa- Social Web design and userny’s supply chain, product development, or base business. media experience E-paymentsStartup costs and appropriate return on investment (ROI) E-commercewill require significant attention, given that building an Personalizationonline channel is so different from extending a mass- Mobile computing Behavioralmarket brand. There is huge potential for companies that economicsfind the right path, but in the meantime, DTC teams willneed to set executive expectations appropriately. ROI willbe lower initially, for example, and required investmentshigher than for a brand extension. The size of the bubble represents the significance of discussions with members of the PwC client base over the last 12 months.A monetization model based on consumer insights Source: PwC.from analytics is critical to DTC channel success.Consequently, companies are conducting ongoing testsof monetization models in markets globally, and theresults are closely guarded.53 Section 2: New paths for the shopping journey
  • 58. Is the time right to invest in a direct-to-consumer channel?Determining the right brand positioning, operating model, technologyenablers, and talentCompanies moving into DTC must define key strategic Analytics is a well-recognized gap for many companies.goals for such areas as: Even if the work is outsourced, the criticality of analytics means that internal organizations must be capable of• DTC value proposition directing the work and interpreting the results.• Target consumer segments and experience model Other talent gaps are in less obvious areas, such as• Target market(s) consumer interactive behavior with online navigation.• Marketing relationships, existing and new A large toy manufacturer struggled for months, for example, to find someone who understood the behavioral• Modes of delivery dynamics of navigation well enough to architect an effective site for DTC.In addition, capabilities and criteria for operating mustalso be defined, including: CPG companies going direct have a choice: They can• Speed to market reconfigure their supply chains to be nimble enough to handle e-commerce orders, or they can outsource fulfill-• Data analysis technologies and insight platforms ment (see “Are your demand and supply chains in synch?” capable of digesting and monetizing information in Section 1). As Clorox’s Steve Robb says, “CPG supply• New product testing and deployment models chains are organized around building full cases, pallets, and trucks of product for major retailers. With direct-to-• Speed with which the organization will need to learn consumer, you need to look at different fulfillment models and be able to respond to markets, promotions, and that make more sense for the consumer.” consumer demands• Feedback loops and innovation requirements Commit to test-and-learn cyclesBuild capabilities to sell direct to the Because the DTC marketplace is so new, CPG companies need to commit to test-and-learn cycles. They need theconsumer processes and the culture to support iterative testing and, given the volatility in the market, they cannot approachConsumers’ expectations for an omnichannel brand the new channel like an SAP implementation. Speed ofexperience require many capabilities that are currently learning will separate the winners from the also-rans inin varying stages of development within organizations. the DTC channel.Top-tier talent will rapidly command a premium as CPGmanufacturers, retailers, local brands, online market- To identify, prioritize, and quantify opportunities forplaces, and third-party providers vie for the same small testing, CPG companies can follow these guidelines:pools of people. • Develop a baseline opportunity and cost model over theCompanies will need to think through whether they will geographies defined as part of the strategy to define thebuild, acquire, or partner for the capabilities they need. target market.In all likelihood, companies will pursue a combination of • Leverage internal (e.g., point-of-sale, inventory) andthese approaches, based on the market and geography. external (e.g., third-party) data to develop a baseline, and confirm the size of potential opportunities. 2012 Financial Performance Report54 Profitable Growth: Driving the Demand Chain
  • 59. Is the time right to invest in a direct-to-consumer channel? Determining the right brand positioning, operating model, technology enablers, and talent• Develop metrics and measurements for tests.• From a business case perspective, value qualitative and quantitative results equally, at least initially. Insights from both will be valuable.• Create appropriate tests and structured timelines for results.• Be deliberate in setting up the appropriate feed- back loops and repositories for analysis of customer behavior. Leverage internal and external data to confirm testing outcomes.Digital touchpoints provide immediate feedback to thesepilot efforts, allowing manufacturers to learn literallyhour by hour, as one executive marveled. An importantcomponent of these test-and-learn cycles, therefore, is toset up processes for quick implementation of changes (e.g.,to a promotion or price) based on this feedback.Never give up who you areIn an omnichannel world, brand and all of a brand’spotential customizations and extensions will remaincrucial to success.It is essential for companies to address how a new DTCchannel—and the direct, real-time conversations withconsumers that the channel enables—will quickly changetheir brands in ways they could not have imagined a fewyears ago.55 Section 2: New paths for the shopping journey
  • 60. Stirring up sustainability demand Two essential ingredients: consumer engagement and reputation managementAfter years of focus on sustainability-related initiatives, Don’t just educate consumers—CPG companies and retailers have made progressive gains engage themin cost-cutting, transparency, and improvements aroundenergy use, packaging, ethical sourcing, and other aspects Companies have long sought to educate consumersof their environmental and social footprint. But now about sustainability by pushing information at them.the big opportunities lie in thinking creatively about the But augmenting education with engagement—fosteringdemand chain. multidirectional dialogue about sustainability with consumers—could yield even more valuable results forThis is no small feat. For one thing, it can be confusing for companies. According to Coca-Cola’s Duane Still, “Whenconsumers to sort through a dizzying array of claims about we actually talk to people and they understand what we’resustainability associated with the products they buy. doing, generally, opinions improve. I think it’s a combina- tion of communicating with a wide range of stakeholdersMoreover, sustainability has different meanings for and encouraging them to communicate with us as well.”different consumers, ranging from fair labor and tradepractices and low carbon emissions to the buy-local move- Research shows that when customers engage with compa-ment, more humane raising of animals for food, and the nies on social media sites, their dollar spend is an averageimportance of addressing childhood hunger. of 30% more than other customers, and they experience a deeper emotional connection to these companies.65 AndHow can companies best help consumers determine consumers who feel deeply engaged by a company orwhich offerings and brands are truly sustainable and product category are often willing to spend more moneytherefore worth choosing—all while running a sustain- in the category they care most about. For example, sales ofable business that’s also profitable? Companies that solve Fair Trade Certified products (which include apparel, food,this challenge stand the best chance of moving sustain- body care products, packaged goods, condiments, andability from a nice-to-have novelty groundswell to a spirits) rose by 75% overall in 2011, and consumers appeargenuine competitive advantage. willing to pay 5% to 10% more for the Fair Trade label.66The encouraging news is that companies are demon- Social media is such a powerful platform for engagementstrating more innovation and experimentation and, because it enables companies to take part in a two-way ormore importantly, are learning from both successes multilateral dialogue with consumers, in real time. Thisand setbacks. Armed with insights gained through hard differs from pushing marketing messages out to consumersexperience, some enterprises are taking sustainability over carefully scheduled intervals. Some companies haveto a new level—integrating it into more aspects of their already engaged consumers by soliciting their insights onbusiness and approaching it more systematically than a broad range of business issues. Unilever has defined aever before. Forward-looking businesses are finding new sustainable business strategy that calls for doubling theways to engage consumers on the subject of sustainability size of its business without increasing its environmentaland to incorporate reputation management tightly into footprint.67 In pursuit of this goal, the company has invitedtheir brand management efforts. We maintain that such consumers to help shape the future direction of its brands,approaches now constitute table stakes for any business marketing, and products through a customer panel calledseeking to tap into sustainability demand. “At Home with Unilever.” The goal is to gain more insights 2012 Financial Performance Report56 Profitable Growth: Driving the Demand Chain
  • 61. Stirring up sustainability demand Two essential ingredients: consumer engagement and reputation managementfrom consumers and “drive the future of the business in Today, a company’s or brand’s reputation may be affectedline with customer demand” by seeking comments on more by what consumers are telling each other aboutsustainability issues and concerns as brands move into it than by what the company itself is telling consumersnew markets. Unilever also runs a Facebook program through its marketing messages. Bert Alfonso ofcalled Unilever VIP, which asks Facebook users about their Hershey comments on how consumer awareness aboutpreferences and opinions; solicits responses to new offer- sustainability issues can color a company’s reputation:ings, marketing campaigns, and sustainable product initia- “Undeniably it’s important to today’s consumer, and sometives; and asks specific questions such as how consumers geographies more than others, and so not only is it therecycle Unilever packaging.68 Programs like these help right thing to do, but frankly, competitively, if you’re notUnilever assess and manage the environmental impacts of active in those sustainable efforts, the consumer willits current products by better understanding how people notice, and it does have an impact.”use them, while simultaneously creating an interactivespace where people can inspire each other to adopt new For these reasons, companies may want to put moresustainable products.69 emphasis on reputation management as part of their brand management efforts when it comes to sustain-Through social media, a company can let consumers know ability. Building trust with consumers involves demon-that it, too, is learning about sustainability and wants to strating that a company doesn’t just think differently, itdo the right thing. Businesses can ask consumers questions also acts differently.such as, “How can we make it easier for you to ‘buy green’?”and “What are your thoughts and concerns about sustain- One way companies can do this is to make their businessability?” These sorts of questions can spark dialogue that practices even more transparent to customers, investors,generates valuable insights for consumers and companies employees, and suppliers. For instance, a company canalike. For example, companies and consumers can exchange invite outside experts with high status and high credibilitythoughts about the trade-offs involved in living and doing (such as third-party authorities and non-governmentalbusiness sustainably, as well as which consumption behav- organizations) to observe their operations. Such authori-iors are truly the most sustainable. ties can confirm that a company’s sustainability-related practices reflect its policies.Don’t just manage your brand—burnish As General Mills’ Don Mulligan explains, “It’s aboutyour reputation ensuring you are known in the circles of credible external organizations—whether they’re environmental organi-In addition to augmenting consumer education with zations or publications that rank companies in terms ofconsumer engagement, companies can benefit by inte- sustainability efforts or corporate social responsibility. Ifgrating reputation management even more tightly into the opinion makers have a favorable view of you, then bytheir brand management efforts. In an interconnected word of mouth, you will strengthen your corporate reputa-world, information about products, brands, and companies tion.” Some businesses may also get third-party assuranceis now a mere search and click away, and the ease with on their sustainability reporting (see the sidebar “Spotlightwhich anyone can see what consumers say about a busi- on sustainability reporting,” page 59).ness or brand, unprompted, in the marketplace, has hugeimplications for corporate reputations.57 Section 2: New paths for the shopping journey
  • 62. Stirring up sustainability demandTwo essential ingredients: consumer engagementand reputation managementSome companies are also giving consumers a window Moving sustainability to a new levelinto their operations. For example, PepsiCo’s Frito-Laydivision announced in 2011 that about half of its portfolio The practices described above could help companies movewould be made with all-natural ingredients by the end of sustainability from mere compliance to efficiency, thenthat year. The division gave consumers an inside look at onward to true market leadership. By advancing theseits operations by broadcasting activities taking place in its ways of thinking about and conducting business, compa-Flavor Kitchen, located at headquarters in Plano, Texas. nies can further channel the energy generated by theAction in the Flavor Kitchen was streamed live for a week sustainability groundswell toward integration of sustain-on screens reaching 22 stories above New York’s Times ability into every aspect of their business. The result maySquare and on the Frito-Lay Facebook page. Consumers be a welcomed increase in consumer demand.could see for themselves how Frito-Lay creates recipesusing all-natural ingredients.70 Environmental success storiesRetailers can play a key role in winning consumers’ trust.For example, they can take responsibility for selecting Earlier this year, the GMA released a new report spot-products that not only deliver good prices, quality, and lighting progress and achievements by food, beverage,functionality to consumers, but that are also sustainable and consumer products companies seeking to reduceor that come from manufacturers or producers using their environmental footprints and promote sustain-sustainable practices. This puts an increased emphasis on able business practices. Titled Environmental Successthe manufacturers as total entities, rather than empha- Stories in the Consumer Packaged Goods Industry, thesizing certain of their brands. report features industry environmental success stories in the categories of air, water, and waste management.Coca-Cola’s Duane Still explains: “There are elements ofsustainability related to specific brands when that is theright thing for those brands, but our efforts generally aremore at a company level. Our brands are generally identi-fied as being a product of The Coca-Cola Company so ourmessaging is around the Company.” Adds Don Mulliganof General Mills, “Corporate reputation is more importantnow than it ever has been. Consumers are increasinglysaying, ‘Who is the company behind the brand? Do I thinkthey are trying to do the right thing?’ Sustainability hasbecome more important from that standpoint.”When a retailer uses choice control—screening outnon-sustainable offerings or those coming from manufac-turers with questionable practices—consumers might feelan enhanced level of comfort shopping there, trustingthat the retailer has done the research for them.For instance, Walmart established a sustainability indexto provide buyers with the information they need toevaluate products’ sustainability.71 2012 Financial Performance Report58 Profitable Growth: Driving the Demand Chain
  • 63. Stirring up sustainability demand Two essential ingredients: consumer engagement and reputation management Spotlight on sustainability reporting The natural evolution in sustainability maturity from “tell” to “show” is mirrored in the shift from environ- Disclosure on sustainability metrics, particularly around mental and social disclosure to performance reporting, greenhouse gas emissions and, more recently, water, resulting in a more intensive critique of available data. is commonplace within the CPG industry. The infor- mation flow—whether through Bloomberg terminals, One of the resulting factors and more interesting trends supplier sustainability scorecards, or annual reports— that we saw among these CPG companies was that 45% is becoming more focused on demonstrating actual now get a third-party view on some or all of the sustain- performance and return on investment. In 2011, 339 ability metrics they’re reporting—a result markedly (68%) of the S&P 500 companies submitted voluntary higher than the 18% we found in the prior year. disclosures, including information on carbon reduction performance, to the Carbon Disclosure Project on behalf The Dow Jones Sustainability Index (DJSI), a set of 551 investors with assets of $71 trillion.72 of indices to measure the financial performance of companies that are considered sustainability leaders, For the fifth year in a row, PwC has analyzed sustain- follows this trend. The DJSI awards high scores to ability reporting among CPG companies. Reporting those companies that can provide assurance over companies in our study include those that establish environmental and social aspects of their sustainability sustainability strategies, report on them, and achieve strategy. Another sustainability reporting organiza- recognition for these activities through well-known tion, the Global Reporting Initiative (GRI), allows third-party sustainability indices. Non-reporting reporting companies to enhance their self-assessed companies report only standard financial data. A reporting grade with a plus (+) to indicate that the data company that reported sustainability data at any time was assured by a third party. during the five-year reference period was included in the reporting group. Less visible to stakeholders is the real internal value companies can gain from going through the assur- Our most recent analysis examined 59 large CPG ance process with a third party. As with other business companies ($4 billion or more in annual revenues). Of processes, another expert review can highlight inef- these 59 companies, 56 have some form of sustainability ficiencies in a system or provide suggestions for process reporting, whether through website content, stand- improvements, including documentation retention, data alone reports, or content integrated into annual reports. calculations, emission factors, governance procedures, Clearly, sustainability reporting has advanced in this and controls. This is critical when it comes to sustain- sector. These results are similar to the prior year, when ability data, because businesses may have little expe- 89% of the companies we analyzed qualified as sustain- rience collecting such data. Moreover, new software ability reporters. solutions have recently been implemented and have not yet been globally adopted by companies or tested through long-term use.59 Section 2: New paths for the shopping journey
  • 64. Section 3 Pursuing growth overseas Emerging markets are evolving rapidly as their middle class expands and domestic brands and retailers come on strong, with technical savvy and a deep knowledge of local consumer behavior. Knowing where, how, and when to invest is the first question for multinational CPG firms, whose investment deci- sions should also be informed by careful risk/reward analysis. You can’t simply transplant your US business to a foreign market, and you’ll need to invest in the right talent to pull off overseas expansion. Different operating models, moreover, come with different commercial and tax considerations that can dramatically alter the economics of the business. Best-in-class companies, therefore, build tax considerations into their strategic decision- making process. 2012 Financial Performance Report60 Profitable Growth: Driving the Demand Chain
  • 65. Capitalizing on emerging market growth opportunities How to approach two areas of particular challenge: brand and talentFor the past decade and a half, the rate of growth in Select the brands, then appeal toemerging markets has been twice that of developed coun- local tastestries, a trend that is unlikely to slow anytime soon. Today,urban populations in emerging markets provide 60% of A company’s brand strategy sets the stage for everythingthe world’s GDP growth.73 And these markets are rapidly that follows. “Know thy customer” is an obvious dictum,expanding: A population the size of Miami (6 million), for yet many companies have been stymied in their effortsexample, is expected to push into Delhi over the next to translate the essence of a product to different cultural15 years.74 consumers without suffering a breakdown in brand identity.The growth opportunities become even richer whenemerging market segments are targeted regardless of Strong global brands such as Apple have in-demand prod-their geography. “The world’s largest and most profitable ucts that easily translate across continents, but retailersemerging market is right here in the United States,” says and CPG manufacturers with broader mixes of productDiageo’s Chris Davies, referring to the changing multicul- formulations and packaging must make more adjustmentstural makeup of the country. “With that mindset, we can to meet local demands, including the local palate.bring our global marketing to bear here—e.g. borrowingJohnnie Walker Chinese New Year activation from Before putting in that work, companies need to selectAsiaPac and running in targeted demographic clusters the brands to globalize. “We are going to pick our spots,”in key US cities.” explains ConAgra’s John Gehring. “For different reasons, snacks and potatoes are categories where we expectWinning significant rewards in emerging markets, to win. In these and other select categories we have ahowever—whether at home or abroad—is an ever- compelling and relatively lower-risk proposition.”more-complex proposition, even for companies that arewell established globally. New rivals are crowding in “We do have brands that spike with specific cultures,”as commerce between emerging markets (south-south) adds Diageo’s Chris Davies, “but they are the icing on thecontinues to increase dramatically.75 A case in point is cake. The bigger prize is in activating our global brands inDubai’s DragonMart, chock-full of Chinese companies ways that are relevant in these cultures—execution thatoffering cut-price products to the rising middle class. is true to the global brand essence, but tailored toSimilar marts are rising up across the Middle East resonate locally.”and Africa.76 For Kraft, the Oreo cookie is the $2 billion power brandIn addition, the rise of digitally enabled consumers in both that could potentially span cultures. That had not yetdeveloped and emerging markets is helping to catalyze a happened five years ago, when Kraft considered pullingfundamental shift in the consumer base, in consumer pref- the brand out of China because it was “spectacularlyerences, and in consumer behaviors. As with all economic underperforming.”77 After the cookie had been in theshifts, the winners will be those companies that can Chinese market for ten years, Kraft began testing newquickly understand the most profitable areas of demand formulas to adjust the sweetness and size of the cookie toand focus their attention accordingly. suit local tastes. Eventually, new flavors such as green tea, raspberry, and blueberry drove a 60% growth in annualBrand and talent continue to challenge CPG companies sales and made Oreo the top-selling cookie in China.78and retailers as they develop their globalization strategies.Brand is the essence of the offering and the power of thepotential, and talent is the catalyst that allows compa-nies to execute in the short timeframes now required tocompete. Focusing on these elements early on will helpcompanies figure out how to place their bets, and where.61 Section 3: Pursuing growth overseas
  • 66. 2012 Financial Performance Report62 Profitable Growth: Driving the Demand Chain
  • 67. Capitalizing on emerging market growth opportunities How to approach two areas of particular challenge: brand and talentThe same type of consumer insights are leading to Brad Jakeman, PepsiCo’s president of Global Enjoymentbidding wars for other potential multicultural power Brands and chief creative officer, explains the problem: “Asbrands. Nestlé, for example, recently paid 20 times Pfizer a brand, we have moved from one advertising campaignNutrition’s estimated earnings in a bidding war for the to another to another. We need to get a lot more disci-drug company’s infant nutrition brands. Now Nestlé has plined. Because we haven’t had an enduring piece of brandthe goods to target Chinese mothers who pamper their language, we just attached different things to the logo allsingle children with expensive foreign brands, particularly the time.”81after the 2008 melamine scare.79 In 2011, the Chinesebaby food market reached $6 billion, and that number To get back to the roots of what Pepsi is about, a team ofis likely to double by 2016.80 Further, newly middle class PepsiCo executives visited a plethora of different marketsmothers in other emerging countries could well make the such as Argentina, Australia, Russia, and the United Arabsame choices for the same reasons as Chinese mothers. Emirates. PepsiCo executives had not undertaken a simi- larly ambitious effort to gather consumer insights sinceIndeed, insights from one market are an excellent avenue the 1990s.82for understanding and targeting consumers in a similarmarket. Cultural, religious, and life experience similaritiesare often far more important than geographical location. Brand translators wantedAs a result, in-market incumbents have an obvious edgeboth in emerging markets and when building south-south Of course, it takes talent to work toward and form insightsmarket presence. about localizing the brand. According to PwC’s 15th Annual Global CEO Survey, the lack of talent in the right place is the single biggest problem CEOs face in trying toHow to speak the brand language expand their companies globally.83The brand message is a springboard for product innova- This war for talent can be both internal and external to thetion and customer engagement. As such, CPG companies organization. One top executive recently recounted howand retailers need to draw on in-country experiences with his direct reports nodded in agreement when he raisedsimilar products and market testing to select the neces- the need for top talent to execute the company’s globalsary local adjustments. A toothpaste manufacturer, for expansion plans. But when he circulated a list of preferredexample, might choose to market “shining white teeth” executives to oversee the global efforts, a chorus of voicesin America, where appearance takes precedence over the protested that all the people on his list were missionother functions of toothpaste (tartar control and gum critical to their current initiatives.health). The opposite decision might be made in othermarkets where oral health is a stronger draw. Externally, retailers and CPG companies are looking for unique skill sets: innovative thinking, an understanding ofSpeaking the brand language isn’t only about extending the culture and nuances, entrepreneurial spirit, a facilityand stretching the brand but also keeping a true core for measuring performance and progress, and strong“language” for the brand. Companies must hold close to systems, process, and operational capabilities. And theirwhat a brand stands for in its purest sense—in any new needs span technical, business, marketing, finance, supplymarket, across time, and across multiple permutations. Or, chain, product, and manufacturing.they must find their way back to the fundamental value ofthe brand, as Pepsi has tried to do with the newly launched“Live for Now” campaign.63 Section 3: Pursuing growth overseas
  • 68. Capitalizing on emerging market growth opportunities How to approach two areas of particular challenge: brand and talentTalent retention is as much of a concern as talent acquisi- Put it all together in a globalizationtion in markets such as China. Hershey’s Bert Alfonso strategyexplains: “It is very hard to retain strong talent that hasa solid base of working with global companies. There is a Even though talent and brand are at the top of the prioritystrong demand from both local companies and multina- list for expanding in emerging markets, they must betionals. Companies use expatriates, but you can’t depend addressed within the context of a global go-to-marketsolely on that strategy.” strategy. The basic tenets of that strategy have been in place for a while, according to Coca-Cola’s Duane Still:As research and advisory firm Gartner recently suggested, “We used to talk about the three A’s. First of all, your“More strategically, as companies continue to globalize, product has to be acceptable. Second, it has to be availablefinding and retaining the right talent are viewed as two of and we have to find outlets, we have to find partners. Wethe primary challenges.”84 have to have a business model that allows our partners and customers to make money. Third, it has to be afford- able. We have to tailor our package sizes and our product offerings around the world to meet the needs and finances of the population that we’re trying to reach.”Exhibit 32Elements of a globalization strategy for CPG companies and retailers Globalization strategy Operating model considerations Excellence in execution • Investment strategy and approach Brand strategy • Consumer preferences and behaviors • Competitive and local retail landscape • Channel mix (retail, consignment, wholesale) Customer • Omnichannel fulfillment networks insights • Global sourcing, manufacturing, and distribution Operational strategy • Merchandising/trade management • Retail operations • Back office support strategy • Legal entity and principal structure Operational Test and • Transfer pricing strategy excellence learn Regulatory strategy • Statutory requirements • Reporting requirements • Currency and treasury • Global analytics and insights • Master data management Information strategy • Global, regional, local sense, and response • Data and information security • Value chain collaboration Marketing Product and sales development • Talent acquisition and management • Localized organizational structure Organizational strategy • Corporate talent and incentives management • Field and talent incentives management • Cultural normsSource: PwC. 2012 Financial Performance Report64 Profitable Growth: Driving the Demand Chain
  • 69. Capitalizing on emerging market growth opportunities How to approach two areas of particular challenge: brand and talentThough the tenets may have stood the test of time, As Diageo’s Chris Davies explains, “Demographic changesexecution based on those tenets has definitely changed. in the United States mean we have to be every bit asA methodical, phased, US-centric approach to market focused on ‘emerging’ opportunities here as we would inentry—market by market, from developed marketplaces to classic emerging markets. We use a number of differentemerging markets—no longer works. models to drive innovation, both in-house and through various partnership models. Some of those initiativesBecause of increased competition and specialization, and will inevitably fail to meet our objectives, but where wethe new realities of sophisticated, digitally connected take gambles, we do it small, to get into the space withoutinternational markets, consumers are ahead of and driving taking undue risks. The key is to have a risk-balancedthe demand curve. A consumer-driven model that delivers innovation portfolio.”more personalized and customizable products results in aglobalization strategy that is complex in all of its elements(see Exhibit 32, page 64). Emerging market brand successSpeed and innovation count as never before, in everything There are and will be many necessary lessons learned infrom developing branding strategy and product mix to approaching, building, and leveraging brand opportuni-integrating the supply and demand chains. Two important ties in new emerging markets. To be successful, compa-areas of innovation that, while not unique to international nies need to be ready for the investment in people andexpansion, are especially challenging to it, are anticipating the ongoing translation and redefinition of their brand.the new changes in demand (simultaneously at the global Winners will recognize emerging market expansion as aand the individual-consumer level) and the rise of the long-term commitment and a continual education process,omnichannel shopper. both locally and globally.Companies must redesign their approaches to commu- According to Harry Broadman, PwC’s chief economist andnication, innovation, and supply chains to address these head of the PwC Emerging Markets practice, “The indus-new challenges or risk being sidelined by consumers who trial landscape of the world market has changed unalter-switch to competitors better able to address their demands. ably. But this is just the beginning. There will be multiple growth nodes from here on out and not just betweenIn this new reality, CPG companies and retailers don’t the advanced countries and the emerging markets—have a long window of opportunity to test and learn. Tight but within emerging markets. The effect on companiescontrols over product innovation and customer feed- from the developed world will continue to be profound.back loops will be necessary market disciplines to build Adopting an investment strategy informed by accuratesuccessful global markets. Further, companies must be information and trusted partners with deep local insightswilling to make mistakes while limiting sunk costs and and experience is the best way to navigate the risk-oppor-ensuring lessons learned are communicated through the tunity tightrope.”85organization. And they must be willing to draw on bothconventional and nonconventional sources of innovation. The biggest risk is not acting at all.65 Section 3: Pursuing growth overseas
  • 70. Capitalizing on emerging market growth opportunities How to approach two areas of particular challenge: brand and talent What do I need to ask about my brand? Take stock of what you know—and don’t know—at the beginning of your brand development/redevelop- ment process. Going through the questions on these key challenges will help you advance your organization in making key decisions. But keep in mind that this question process is not linear; the feedback loop creates a need for constant refinement. Each answer should inform the other questions; ignoring them may create a risk that undermines the entire effort. Here is a short starter list. • Brand delivery and customer service. What are the local requirements and norms that may be different? How do I adjust my service levels and brand to address cultural differences and norms? • Insource/outsource partnership models. What are the most effective market entry models? Who are the right partners in the market to help me execute my vision? What is their local reputation? Are they able to scale with me? Do they have an online presence? • Merchandising, product positioning, and pricing. How will products be modified and manufactured to suit local market tastes? How should they be packaged? What are the appropriate market price points and positioning? • Securing people talent. Are the right people available in the markets where we would like to operate? How can I effectively ramp up and down efforts based on market demand? • Organizational structure. Do we have a centralized or decentralized structure? What reporting structures would be most appropriate for supporting market growth? • Supply chain. How flexible and scalable is it? How quickly can it respond? • Technology support. What corporate systems and software can be leveraged locally? What are the business requirements now—and over the long term as demand grows? Can available technologies scale to requirements and integrate? What new technologies need to be deployed? Do they need to be locally customized? 2012 Financial Performance Report66 Profitable Growth: Driving the Demand Chain
  • 71. Before expanding abroad, dig deeper into the tax implications Involve your tax function from the start to inform creation of a tax-efficient business modelCPG and retail companies planning international expan- • Law change uncertainty. Even the best structuression face many decisions about how best to build brand must be constantly re-evaluated. Changes often ariseand grow revenues. Different operating models, from in tax laws or the broader business climate. Recent taxe-commerce to direct sales, come with different commer- proposals in India, for instance, are sending mixedcial and tax considerations that can dramatically alter signals to multinationals about investment prospects inthe economics of the business. When companies decide to that country, and should be weighed carefully.expand in a local market by shifting demand chain activi-ties, careful consideration of the tax consequences should Getting tax departments involved early in the strategicbe undertaken. planning process can lead to more informed decisions about international expansion.The decision about whether and how to enter a foreignmarket should hinge first on the investor’s criteria for eval-uating business opportunities (What is a market opportu- Tax considerations for three operatingnity? Is it strategic? And what other competing investment modelsopportunities exist?), but tax considerations should alsoplay an important role. ConAgra’s John Gehring describes Many US-based companies planning to expand interna-the role of taxes for his company: “It might impact how tionally struggle with choosing the right model for a givenmuch risk we’re willing to take, and it might impact some market or region. Although the laws vary widely acrossof the return metrics in terms of how good we feel about markets, there are several key considerations for the threegoing into a market.” basic operating models: e-commerce, franchise/licensing arrangement, or direct physical presence.Companies should align business development teams withtax executives to understand the tax aspects of expansion Export/e-commerceon several fronts:• Operating models. Ensure operational and tax strate- This “toe in the water” approach allows companies to gies are aligned. With rare exceptions, tax structuring explore overseas opportunities with little or no invest- without full business sponsorship will eventually fall ment in additional infrastructure. Growth opportunities apart. through a strictly e-commerce operational model will be limited by long distances, which compound the logis-• Compliance. Tax and regulatory compliance burdens tics and costs of order fulfillment. Moreover, because should not be underestimated. Accounting, tax, trea- e-commerce opportunities are often managed entirely sury, and information systems are all areas that must be from the United States, limited opportunities exist to carefully considered and maintained. implement tax planning. Absent meaningful international involvement, including in-house supply-chain activities• Identifying new markets. Many US-based companies located outside the United States, most e-commerce profits have traditionally maintained limited demand chain will flow back to the United States and be taxed at one of footprints overseas through e-commerce, external the highest income tax rates in the world. franchising/licensing, and basic/limited-risk store modalities (including “pop-up” stores). As the demand chain expands, executives should evaluate structuring and tax-planning opportunities that did not exist within these three models.67 Section 3: Pursuing growth overseas
  • 72. Before expanding abroad, dig deeper into the tax implications Involve your tax function from the start to inform creation of a tax-efficient business modelFranchise/licensing target income from highly portable property, including royalties from intangibles. While US taxation of incomeFranchising is often perceived as a way to have a physical earned by foreign subsidiaries of US companies ispresence in a foreign market without being subject to the deferred until the subsidiary remits the profits back tosame level of regulation, market risk, or financial invest- the United States, royalty income generally constitutesment requirements, since these risks are borne by the one type of subpart F income and is taxed immediatelyfranchise partner/licensee. The business advantages of in the United States. Exceptions exist for foreign subsid-franchising/licensing over export/e-commerce businesses iaries that earn royalties from unrelated parties if suchcarry risks in finding the right partner, as well as increased foreign subsidiaries are “active developers” or “activetax complexity: marketers” of the licensed intangibles. But meeting these subjective exceptions can be difficult in practice.• Withholding tax liability. Royalties from an overseas franchise are generally subject to local withholding tax. Direct physical presence A company franchising or licensing a product offshore must be mindful of how those payments are structured Once the business decides to locate a direct physical and the jurisdiction it chooses to ensure a reasonable presence in a new market, a tax liability, or filing require- withholding rate. The structure must make commercial ment, typically arises in that local market. Additionally, sense, however, rather than being designed purely for some form of taxable compensation is due from that local the purpose of achieving lower withholding tax rates market to the United States for the intellectual property through “treaty shopping,” which tax inspectors will owned by the US parent, and for services performed. evaluate during an audit. From a tax perspective, this is often akin to the franchise/• Risk of “permanent establishment” designation. licensing model, except that the licensor/licensee rela- Franchise or licensing arrangements invariably require tionship is internal. When intellectual property is located guidance, training, and some degree of supervision outside the United States, US tax deferral planning for from the parent company. Once a US company deploys royalty income received by a foreign subsidiary can be personnel to the licensee to provide such assistance, it somewhat simpler. The deferral provisions involving risks a “permanent establishment” designation, which related party royalty income tend to be more objective creates a local taxable presence. While the risks can and offer greater certainty than the tests applicable to an typically be managed with proper planning, in some unrelated party. countries, the creation of a taxable presence has a low bar. In Kuwait, for instance, the receipt of royalties For those companies with developed in-house supply from Kuwaiti sources, without any other commercial chain models that sell into local markets, the intercom- connection, may be sufficient to subject the recipient to pany inventory flows must be evaluated under a different net income taxation and the need to register and file tax set of tax rules. Unless a subsidiary is buying directly from returns with local authorities. unrelated parties or selling any property purchased from a related party wholly within the subsidiary’s country of• IP ownership. Royalties are generally required for incorporation, it is difficult to achieve US tax deferral on intellectual property held by companies in the United such income. For example, the income earned by a Dutch States, subjecting the IP owner to taxation at one of regional distributor that buys inventory from its related the highest rates in the world. Even for companies that sourcing company but sells to customers throughout own the legal or economic rights of licensed intan- Europe will effectively be taxed at the US rate of 35%, not gibles outside of the United States, US tax rules make the lower Dutch statutory rate. Integrating the supply and it difficult to avoid tax from the offshore franchising/ demand chains is critical to an effective tax strategy when licensing operations. The so-called “subpart F” rules a company commits to entering a new market. 2012 Financial Performance Report68 Profitable Growth: Driving the Demand Chain
  • 73. Before expanding abroad, dig deeper into the tax implications Involve your tax function from the start to inform creation of a tax-efficient business modelThe tax implications of an efficient • Favorable treatment in target markets. Once thebusiness model tax burden in the global or regional hub is addressed, the supply and demand chains throughout the localAs US-based companies expand their presence abroad, markets must be designed in a tax-efficient manner.they inevitably migrate demand-chain activities into the Among the questions a prudent tax advisor might asklocal region, introducing new tax considerations and is whether the royalty payments to the IP holder arepotential opportunities. subject to withholding taxes or whether such payments are fully deductible from the payor’s local tax base. Further, one should evaluate the different results thatConsider the case of a US-based retailer adapting its brand could be achieved by structuring payments as a royalty,and product to the culture of the new host market. The as a service fee, or as a mark-up on products sold.local team may develop a customized store concept orcreate branding and advertising distinct from the platform • Integrated profit redeployment. Reinvestment ofalready developed by and for the United States, for which cash generated from the performance of a strategi-a royalty is likely paid or due to the US parent. The new, cally designed business model is an important factorlocalized intangible asset will drive the retailer’s future to consider. A globally expanding company shouldsuccess in the jurisdiction and future taxable income for develop a plan early on for redeploying such profitsthe local government. A similar situation could occur with without incurring substantial tax leakage from with-a CPG distributor that develops a new product, strategy, or holding taxes or direct income taxes incurred fromprocess for the local marketplace. distributions directly to the United States. Any plan will be closely tied to the company’s need to use suchWhen we consider other common types of intangible funds as part of its global expansion.assets—trademarks, trade names, patents, designs, • An expedient exit. Because business realities andpatterns, franchises, licenses, contracts, and so on—the laws change, an expansion plan should include under-link between demand-chain activities and the impact standing the tax aspects of an exit strategy. The strategyof those intangibles on profitability has to be analyzed. should include capital gains taxes, liquidation costs,Intangible assets are often associated with the company’s and the use of tax attributes (such as tax losses carriedbrand, the reputation and strength of the brand drives over from prior years) to offset the cost of exiting.demand, and demand drives profits. Accordingly, demandchains must be carefully structured from a tax perspective. • Transfer pricing. How a company allocates profits internally between US, global, or regional headquarters• Choice of jurisdiction. When first expanding offshore, and an overseas operation is under constant scrutiny by picking a jurisdiction close to customers and talent is local tax authorities. Arbitrary profit allocations allow vital. Once critical mass occurs offshore, businesses may room for tax authorities to attack a company’s transfer want a global or regional hub to manage demand-chain pricing policy or argue that, because profits have moved activities. A centralized model in a tax-efficient juris- across borders, assets must also have moved—and thus diction can have a significant impact on a company’s subject such asset transfers to exit taxation. Companies return on investment. Cross-border activities conducted must use caution when initially establishing intercom- by a global or regional hub require significant business pany agreements to understand the current and long- substance and must be carefully monitored to avoid term consequences of such arrangements. creating additional tax issues.69 Section 3: Pursuing growth overseas
  • 74. Before expanding abroad, dig deeper into the tax implications Involve your tax function from the start to inform creation of a tax-efficient business model• Documentation. It is important to maintain current, Countries are constantly adapting their laws and audit comprehensive documentation of all activities within approaches. For emerging markets such as India, this the value chain. Documenting relevant business change is a consequence of market maturation; in more substance is necessary for defending the intercompany developed countries, it may be the result of governments’ transfer pricing approach used in allocating profits intensifying need for revenues in an era of increasing between tax jurisdictions. national debt. Many jurisdictions are also vigorously reviewing transactions to ensure they have businessBest-in-class companies build tax considerations into substance.their strategic decision-making process so that they canforecast the benefits that will flow from them. Long- As business executives weigh their options for interna-term, this can lead to a lower effective tax rate, reduced tional expansion, they should consider their tax experts astax risk, enhanced cash flow, and greater shareholder true partners in developing a tax-efficient business model.value. Within such companies, tax is viewed as a strategic Whether restructuring businesses, prioritizing overseaspartner and is a key part of all strategic decisions. investments, or making channel decisions, the tax function should be involved from the outset. Duane Still says that at Coca-Cola, tax is “a key factor in our considerations—soDealing with change important that we literally teach everybody in finance to consider it and think about it.” He goes on to state thatAfter the considerations above have been addressed, taxes are considered “sometimes even in the conceptualoperating and tax structures must be constantly stage of a project before it gets to a significant decisionreviewed and adapted. For example, the transfer of point. It’s just that important to us.”key decision-makers from one market to another as aresult of centralization of regional pricing decisions orthe integration of an acquired company could requirea rethink of the factors above in light of the company’sfuture operating model. 2012 Financial Performance Report70 Profitable Growth: Driving the Demand Chain
  • 75. Financial performance metrics • Retailer performance data • Manufacturer performance data • Size-specific data • Sector-specific data  71 Financial performance metrics
  • 76. Retailers and manufacturersThis section contains charts illustrating the 2011 perfor- Notwithstanding strong sales growth and only narrow mar-mance of CPG retailers as a whole, relative to the popula- gin deterioration, EBIT growth declined at a sharper ratetion of manufacturers in our performance database. for manufacturers, from 14.4% to only 1.7% growth, while retailers maintained steady EBIT growth at 10.8% in 2011From a macroeconomic standpoint, by definition, the compared with 10.9% in the prior year. Both, however, arerecovery that began in 2010 continued throughout 2011, likely below what was hoped for at this point a year ago.yet shareholder returns declined for both retailers and With a decline in margin, this minimal earnings growthmanufacturers. Our analysis over the past several years has for manufacturers is likely still the result of cost-cuttingshown that retailer shareholder return has trended along initiatives but, as discussed throughout this report, the realwith the state of the economy, with big declines in 2009 growth potential lies within the demand chain.during the peak of the recession and then big improve-ments in 2010 as the industry emerged into recovery mode. Retailers have consistently had quicker cash conversion cycles compared to manufacturers, principally due to theirThe telling story this year is that retailers have only a slight ability to collect from consumers at the point of sale, yetedge on manufacturers: 10.3% versus 8.7% shareholder benefit from 30- to 60-day payment terms with manufac-return, a narrow margin of 1.6% as compared to the prior turers. This trend continued during 2011, though bothyear’s difference of 8.8%. This may be an indication that groups saw improvements in conversion periods: Manu-investors are not as bullish toward the CPG industry as facturers improved 55.5 to 53.3 days, and, impressively,they were at the start of the recovery. Let’s explore if this retailers improved from 12.0 to 10.2 days, representing thesentiment is supported by retailers’ actual financial second year in a row that retailers cut more than one fullperformance. day out of this cycle.Net sales increased for both retailers and manufacturers, So, while performance improved for both retailers andwhich is at least in part a result of manufacturers and re- manufacturers, as measured by earnings growth, investorstailers passing along increased input costs to the consumer remain tepid and are not yet rewarding these companiesthrough price increases. But how much were they able through shareholder returns. It will be interesting to watchto recover? A look at margins indicates that both groups ex- how these consumer sentiments develop during 2012.perienced an approximate erosion of 1%, with retailers de-clining from 26.5% to 25.5% and manufacturers decliningfrom 36.8% to 35.7%. With the difficulty both retailers andmanufacturers experienced in fully recovering increasinginput costs, companies are attempting to introduce moreproduct capabilities, such as stronger cleaning capabilitiesfor household products. But the rub is that product perfor-mance has to support the new price point. Retailers have only a slight edge on manufacturers in shareholder return: 10.3% versus 8.7%, a narrow margin of 1.6% as compared to the prior year’s difference of 8.8%. 2012 Financial Performance Report72 Profitable Growth: Driving the Demand Chain
  • 77. Companies are attempting to introduce more product capabilities, such as stronger cleaning capabilities for household products.Exhibit 33Retailers: Comparison to manufacturers dataMedian shareholder return Median net sales growth Median EBIT growth Median free cash flow to sales20% 30% 60% 20% 16.715% 40% 15% 20% 12.010% 20% 10% 10.3 8.7 10% 7.7 7.4 0% 6.4 5% 5% 5.8 3.8 3.3 2.6 2.6 0% 0% -20% 0%-10% -10% -40% -5% 1-year 3-year 5-year 2006–07 2007–08 2008–09 2009–10 2010–11 2006–07 2007–08 2008–09 2009–10 2010–11 1-year 3-year 5-yearMedian gross margin Median inventory turnover Median return on Median cash conversion cycle average assets60% 12 20% 140 12040% 9 15% 100 8020% 6 10% 60 0% 40 3 5% 20-20% 0 0% 0 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 Source: Reuters Fundamentals, Reuters Pricing, and PwC Analysis. Retailers Manuf acturers Retailers Manuf acturers Financial performance metrics73 Retailers and manufacturers
  • 78. Overall CPG industry: manufacturersWhile the recovery began in 2010, the pace of financial Productivity measures suggest that companies are keep-improvement was slower than many expected in 2011. ing a steady workforce level, even with increasing salesOutside of the consistent net sales growth among the figures—so increased investments (including hiring) inmanufacturers in each quartile, there has been a decrease the emerging markets suggest that employee levels in thefor manufacturers as it relates to shareholder return, EBIT United States are declining. While good for current P&Ls,growth, and return on sales. There are a number of drivers this trend does not bode well for the overall US economy.of these declines, but what’s more important is what manu- Companies are starting to look to capital spending but arefacturers are doing now to get back those strong results also using marketing spending to improve their financialthat gave hope to a recovering economy. performance.Median one-year total shareholder return decreased from A look at SG&A as a percentage of sales sheds some light.15% in 2010 to 8.7% in 2011. The slow economic recovery The steady median percentage (23.3% to 23.6%) indicateshas left its mark on the manufacturing industry. Never- some modest spending on marketing initiatives, likely intheless, net sales growth continues to be on the rise and areas such as social media, digitalization, and mobiliza-manufacturers have lost very little on gross margins across tion to meet consumer purchasing behaviors, particularlyall quartiles, providing comfort that consumers are still within the millennial generation. With the economy un-spending, albeit cautiously. dergoing constant shifts, manufacturers have been able to maintain their consumer base and focus on it particularlyEBIT growth declined, particularly within the bottom during these times.quartile. This group was on the verge of breaking the posi-tive mark in 2010, but has now tumbled to negative 26.5%, Looking at liquidity trends, median debt levels are keepinglikely driven by increased input costs and weaker brands steady (as seen through the consistent debt-to-equity ratiosthat could not fully recover through increased pricing. This and short- and long-term debt ratio) and the slight declineis also evidenced in return on sales, which declined from in the interest coverage ratio is principally driven by the9.7% to 9.2% from 2010 to 2011. corresponding decline in EBIT growth offset by lower costs of debt experienced this past year. Free cash flows haveOn a more positive note, the return on invested capital continued their decline from 2009 and 2010, but have stillstayed relatively consistent at 9.4%, compared to 9.6% in stayed relatively strong.2010. Investments companies are making in areas such asemerging market expansion are now resulting in steadyreturns, and have the potential to lead to even greaterreturns as large-scale investments come to fruition. Consumers are still spending, albeit cautiously. 2012 Financial Performance Report74 Profitable Growth: Driving the Demand Chain
  • 79. Companies are starting to look to capital spending but are also using marketing spending to improve their financial performance.Exhibit 34Overall CPG industry, manufacturers (companies > US$50M)Return metricsMedian shareholder return Median return on invested capital Return on market capital20% 20% 15% 16.715% 15% 10%10% 10% 9.4 9.0 8.7 8.5 5% 5% 5% 3.8 0% 0% 0% 1-year 3-year 5-year 1-year 3-year 5-year 2007 2008 2009 2010 2011Liquidity metricsCurrent ratio Interest coverage ratio Debt-to-equity ratio Short-term debt to long-term debt ratio3 20 3 1,0 0,8 152 2 0,6 10 0,41 1 5 0,20 0 0 0,0 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011Growth metricsNet sales growth EBIT growth30% 60% 18.6% 40%20% 20% Source: Reuters Fundamentals, Reuters Pricing, and PwC Analysis.10% 1.7% 0% Median 0% -20% Top quartile Median-10% 2006–07 2007–08 2008–09 2009–10 2010–11 -40% 2006–07 2007–08 2008–09 2009–10 2010–11 -26.5% Bottom quartile Financial performance metrics75 Overall CPG industry: manufacturers
  • 80. Exhibit 34 (continued)Overall CPG industry, manufacturers (companies > US$50M) Income statement metricsMedian free cash flow to sales Return on sales Sales per employee Gross margin 12% 20% $600K 60% 10% 15% 8% $400K 40% 7.7 7.4 6% 10% 6.4 4% $200K 20% 5% 2% 0% 0% $0K 0% 1-year 3-year 5-year 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 SG&A as a percentage of sales Effective tax rate 50% 50% 40% 40% 30% 30% 20% 20% 10% 10% 0% 0% 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011Balance sheet metricsInventory turnover Return on average assets Cash conversion cycle12 20% 140 120 9 15% 100 80 Source: Reuters Fundamentals, 6 10% Reuters Pricing, and PwC Analysis. 60 Median 40 3 5% Top quartile 20 Median 0 0% 0 Bottom quartile 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 2012 Financial Performance Report76 Profitable Growth: Driving the Demand Chain
  • 81. Size-specific data: large, medium, and small manufacturersThis section includes charts analyzing the performance of panies experienced modest EBIT growth. Small companieslarge, medium, and small manufacturers. generally do not boast brands that are strong enough to command price increases, even in times of increasing inputAs we have highlighted in the previous sections, share- costs. Additionally, they do not have as much flexibility toholder return has been a defining data point for 2011, and move between channels to fit the latest consumer trends,that’s no less true in the size-specific comparison. All three whether shoppers are bargain-hunting at the dollar storessize categories saw declines in shareholder return, but or looking for flexibility through digital channel purchases.the most significant drop was in the small manufacturerscategory, which declined steeply from 26.6% in 2010 (the On the bright side, small companies seem to have muchhighest that year among the size categories) to negative more borrowing flexibility than they did during the credit31.9% in 2011—a 58.5% swing. Small manufacturers were crunch. Their overall debt levels increased, as seen in thealso the only size category to have negative shareholder debt-to-equity ratios, but these borrowings are at shorterreturn. Tepid consumer confidence typically hurts small terms with lower rates, as demonstrated by an improved in-companies the most. Small companies, as measured by terest coverage ratio and a higher short-term to long-termrevenue dollars, generally have more modest capitaliza- debt ratio. What remains to be seen is whether smallertion levels, making them more vulnerable to volatility. But companies use these borrowings for investment purposes,another point of view is that investors are naturally putting as their larger counterparts are doing, or whether theytheir dollars with larger companies that are demonstrating need them just to survive.stronger overall financial performance, leading to an abilityto grow into the future—what many call an example of thevirtuous cycle.The trend of improved net sales growth continued witheach of the size categories, though small companies took abigger hit to margins (with a decline of 3.2%) compared tomedium companies (which saw an improvement of 0.5%)and large companies (whose margins were flat). Smallcompanies experienced an even steeper decline in EBITgrowth, at negative 29.2%, where medium and large com- All three size categories saw declines in shareholder return, but the most significant drop was in the small manufacturers category. Financial performance metrics77 Size-specific data: large, medium, and small manufacturers
  • 82. The trend of improved net sales growth continued with each of the size categories, though small companies took a bigger hit to margins compared to medium and large companies.Exhibit 35Size-specific data, all sectorsReturn metricsMedian shareholder return Median return on invested capital Median return on market capital20% 20% 15% 19.7 19.115% 15% 10% 12.6 10% 10.8 10% 9.9 9.4 8.9 8.5 8.2 7.5 7.1 5% 5% 5.9 5% 4.4 3.8 2.4 2.2 0% 0% -1.7 -31.9-30% -5% 0% 1-year 3-year 5-year 1-year 3-year 5-year 2007 2008 2009 2010 2011Liquidity metricsMedian current ratio Median interest coverage ratio Median debt-to-equity ratio Median short-term debt to long-term debt ratio 3 20 3 1.5 1.2 15 2 2 0.9 10 0.6 1 1 5 0.3 0 0 0 0.0 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011Growth metricsMedian net sales growth Median EBIT growth30% 10.9% 60% 40% Source: Reuters Fundamentals,20% Reuters Pricing, and PwC Analysis. 20%10% 7.5% Large manuf acturers Medium manuf acturers 0% Small manuf acturers 0% -20% Large manuf acturers Medium manuf acturers-10% 5.6% -40% Small manuf acturers 2006–07 2007–08 2008–09 2009–10 2010–11 2006–07 2007–08 2008–09 2009–10 2010–11 2012 Financial Performance Report 78 Profitable Growth: Driving the Demand Chain
  • 83. Exhibit 35 (continued)Size-specific data, all sectorsIncome statement metricsMedian free cash flow to sales Median return on sales Median sales per employee Median gross margin12% 20% $600K 60%10% 15% 8% $400K 40% 8.4 7.9 7.2 6.5 6% 10% 6.4 5.9 4% $200K 20% 5% 2.9 2% 0.7 2.0 0% 0% $0 0% 1-year 3-year 5-year 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011Median SG&A as a percentage Median effective tax rateof sales50% 50%40% 40%30% 30%20% 20%10% 10% 0% 0% 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011Balance sheet metricsMedian inventory turnover Median return on average assets Median cash conversion cycle12 20% 140 120 9 15% Source: Reuters Fundamentals, 100 Reuters Pricing, and PwC Analysis. 80 6 10% Large manuf acturers 60 Medium manuf acturers Small manuf acturers 40 3 5% Large manuf acturers 20 Medium manuf acturers 0 0% 0 Small manuf acturers 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 Financial performance metrics79 Size-specific data: large, medium, and small manufacturers
  • 84. Size-specific data: very large manufacturersThis section includes charts analyzing the performance of Productivity improved, as measured by sales per employee;the largest of the large manufacturers, those with reported however, taken with the sales growth noted above, this wasnet sales of greater than $10 billion in the latest reported likely driven by a flat or declining workforce. Based on thefiscal year. For these companies, much of the storyline unemployment measures experienced by this industry, ifcontinues from the previous size discussion. In this discus- workforces are flat overall, that likely points to an employ-sion, however, we will focus on a different return metric— ment decline in the United States and an increase in thereturn on invested capital (ROIC), rather than shareholder global economies.return—to highlight the fact that size had a significantimpact on financial performance during 2011. All in all, strong financial results for very large companies signal that they have continued to thrive despite a slowOur analysis over the previous five-year period has shown recovery. They are doing this by launching initiatives suchthat the larger the company, the stronger the ROIC perfor- as international expansion and being where the consumersmance, indicating that larger companies are more effec- are, particularly in the digital channels.tive at managing their capital investments. So where hasthis investment spend been going recently? Our researchhas shown that the emerging markets strategy makes theagenda of nearly every very large company, but is absent atmany small companies. This may be an area of opportunityfor small companies to put better practices in place to man-age investment spend more effectively, particularly as thedebt markets have opened up and cash for investment maybe more readily available.From an income statement perspective, net sales growthwas strong for very large companies, at 10.5%. At the sametime, the very large companies maintained their margins,supporting the theory that larger companies generally havestronger brands and are better able to pass pricing alongto the consumer. Additionally, EBIT growth improved overthe prior year, a feat that no other size category achievedin 2011. Net sales growth was strong for very large companies, at 10.5%. 2012 Financial Performance Report80 Profitable Growth: Driving the Demand Chain
  • 85. Very large companies are thriving by launching initiatives such as international expansion and being where the consumers are, particularly in the digital channels. Exhibit 36 Very large manufacturers, all sectorsReturn metricsMedian shareholder return Median return on invested Median return on market capital capital 12.5% 15%20% 20% 12.5 12.1 12.115% 15% 10% 13.610% 10% 12.1% 9.7 5% 5% 5% 0% 3.4 12.1% 0% 0% 1-year 3-year 5-year 1-year 3-year 5-year 2007 2008 2009 2010 2011Liquidity metricsMedian current ratio Median interest coverage ratio Median debt-to-equity ratio Median short-term debt to long-term debt ratio3 20 3 1.0 0.8 152 2 0.6 10 0.41 1 5 0.20 0 0 0.0 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011Growth metricsMedian net sales growth Median EBIT growth30% 40%20% 20%10% 0% Source: Reuters Fundamentals, Reuters Pricing, and PwC Analysis. 0% -20% Very large manufacturers-10% -40% Very large manufacturers 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 Financial performance metrics81 Size-specific data: very large manufacturers
  • 86. Exhibit 36 (continued) Very large manufacturers, all sectorsIncome statement metricsMedian free cash flow to sales Median return on sales Median sales per employee Median gross margin10% 20% $600K 60% 9.9 9.4 8% 8.8 15% $400K 40% 6% 10% 4% $200K 20% 5% 2% 0% 0% $0K 0% 1-year 3-year 5-year 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011Median SG&A as a percentage Median effective tax rateof sales50% 50%40% 40%30% 30%20% 20%10% 10% 0% 0% 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011Balance sheet metricsMedian inventory turnover Median return on average assets Median cash conversion cycle12 20% 140 120 9 15% 100 80 6 10% 60 Source: Reuters Fundamentals, Reuters Pricing, and PwC Analysis. 40 3 5% 20 Very large manufacturers 0 0% 0 Very large manufacturers 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 2012 Financial Performance Report82 Profitable Growth: Driving the Demand Chain
  • 87. Sector comparisonThis segmentation of our industry data breaks the compa- increased borrowing costs, as reflected by the consider-nies into three groups: companies that produce primarily able drop in the median interest coverage ratio, whichhousehold products, companies that produce primarily had been on a steady incline. Also notable is the increasefood, and companies that produce primarily beverages. in household product companies’ effective tax rate, whichThe comparisons in the graphs are all written based on moved from 28.9% in 2010 to 30.8% and made householdmedian values. products the only sector to experience an increased rate. There are some challenges being faced by this sector as anIn 2011, the three-year median, as it relates to shareholder economy on the rebound is still being cautious. The house-return and return on invested capital, now seems to be the hold products sector had the lowest net sales growth oftimetable needed to reap the most return from your invest- all the sectors and experienced a decrease in its return onment. This is a turn from 2010, which reflected one-year sales for the year, from 11.1% to 9.8% in 2011. Some goodreturns significantly improved over the three- to five-year mentions would be the sector’s ability to hold cash conver-median. However, each of the sectors continued to show sion cycle and inventory turnover ratio relatively flat. Grossstrong net sales growth. Food, beverage, and household margin also rose slight over 2010, from 46.5% to 47.3%.product companies experienced net sales growth of 9.5%,10.5%, and 7.5%, respectively. For the food sector, the needle has not moved far from where the results landed in 2010. Return on sales and EBITThe beverage sector continued with its strong perfor- growth stayed relatively flat, and only slight movementsmance from 2010, with improving financial metrics such were noted in gross margin and the balance sheet metricsas return on sales and gross margins, and at the same time of inventory turnover, return on average assets, and cashimproving productivity as measured by sales per employee. conversion cycle. Despite food price increases throughFurthermore, median cash conversion decreased from 49.9 2011, the food sector is keeping a steady pace, maintainingdays in 2010 to 45.1 days in 2011, inventory turns stayed its improved results from 2010.flat, and return on average assets increased from 9.7% to10.8% in 2011. This reflects healthy assets that can quicklybe converted into cash and support a profitable business.Unlike the beverage sector, the tide had changed for thehousehold sector in some instances. In 2010, the householdproducts sector experienced strong EBIT growth; however,in 2011, EBIT actually declined by 5.6%—the steepest dropof all the sectors and the only one to experience a declinein this measure. The household products sector also saw Food, beverage, and household product companies experienced net sales growth of 9.5%, 10.5%, and 7.5%, respectively. Financial performance metrics83 Sector comparison
  • 88. Despite food price increases through 2011, the food sector is keeping a steady pace, maintaining its improved results from 2010.Exhibit 37Sector-specific data, all sectorsReturn metricsMedian shareholder return Median return on invested capital Median return on market capital20% 20% 15% 19.3 16.715% 15% 10% 11.7 11.7 11.1 11.110% 10% 9.8 9.6 9.4 9.4 9.2 8.5 5% 8.3 7.9 5% 5% 6.3 5.0 3.0 4.6 0% 0% 0% 1-year 3-year 5-year 1-year 3-year 5-year 2007 2008 2009 2010 2011Liquidity metricsMedian current ratio Median interest coverage ratio Median debt-to-equity ratio Median short-term debt to long-term debt ratio3 20 3 1.5 1.2 152 2 0.9 10 0.61 1 5 0.30 0 0 0.0 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011Growth metricsMedian net sales growth Median EBIT growth30% 10.5% 60% 40%20% Source: Reuters Fundamentals, Reuters Pricing, and PwC Analysis. 20%10% 9.5% Beverage 0% Food Household products 0% -20% Beverage 7.5% Food-10% -40% Household products 2006–07 2007–08 2008–09 2009–10 2010–11 2006–07 2007–08 2008–09 2009–10 2010–11 2012 Financial Performance Report84 Profitable Growth: Driving the Demand Chain
  • 89. Exhibit 37 (continued)Sector-specific data, all sectorsIncome statement metricsMedian free cash flow to sales Median return on sales Median sales per employee Median gross margin12% 20% $600K 60%10% 10.4 9.6 15% 40% 8.9 8% 8.5 $400K 8.0 7.1 6% 10% 20% 6.2 5.4 4.8 4% $200K 5% 0% 2% 0% 0% $0K -20% 1-year 3-year 5-year 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011Median SG&A as a percentage Median effective tax rateof sales50% 50%40% 40%30% 30%20% 20%10% 10% 0% 0% 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011Balance sheet metricsMedian inventory turnover Median return on average assets Median cash conversion cycle12 20% 140 120 9 15% Source: Reuters Fundamentals, 100 Reuters Pricing, and PwC Analysis. 80 6 10% Beverage 60 Food Household products 40 3 5% Beverage 20 Food 0 0% 0 Household products 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 Financial performance metrics85 Sector comparison
  • 90. Appendix A: Financial performance metrics methodologyIn the Financial Performance Metrics section we present includes annual financial data from 2006 through 2011,key industry metrics, some of which are discussed by fiscal year, for publicly traded companies. The reportthroughout the report, based on an analysis of financial uses restated data that accounts for mergers, acquisitions,data for a set of CPG manufacturers and retailers (see divestitures, and accounting changes. All data usedAppendix B and Appendix C). In this appendix, we describe to construct financial metrics is “as reported” by thethe data sources used and the data preparation steps taken companies. Additionally, the study team collected financialto produce these metrics. data for private-sector manufacturers through a survey administered by the GMA.Data sourcesReuters Fundamentals data was the primary source of datafor the analysis presented in the Financial PerformanceMetrics section of this report. This Reuters datasetExhibit 38Primary manufacturer NAICS codes by sector NAICS NAICS Sector code NAICS description Sector code NAICS description Beverage 312111 Soft drink manufacturing Food 311812 Commercial bakeries Beverage 312112 Bottled water manufacturing Food 311823 Dry pasta manufacturing Beverage 312120 Breweries Food 311911 Roasted nuts and peanut butter manufacturing Beverage 312130 Wineries Food 311919 Other snack food manufacturing Beverage 312140 Distilleries Food 311920 Coffee and tea manufacturing Food 311211 Flour milling Food 311942 Spice and extract manufacturing Food 311225 Fats and oils refining and blending Food 311999 All other miscellaneous food manufacturing Food 311230 Breakfast cereal manufacturing Household 311111 Dog and cat food manufacturing Food 311312 Cane sugar refining products Food 311320 Chocolate and confectionery manufacturing Household 311119 Other animal food manufacturing from cacao beans products Food 311330 Confectionery manufacturing from purchased Household 322291 Sanitary paper product manufacturing chocolate products Food 311340 Non-chocolate confectionery manufacturing Household 325412 Pharmaceutical preparation manufacturing Food 311411 Frozen fruit, juice, and vegetable products manufacturing Household 325611 Soap and other detergent manufacturing Food 311421 Fruit and vegetable canning products Food 311511 Fluid milk manufacturing Household 325612 Polish and other sanitation good products manufacturing Food 311514 Dry, condensed, and evaporated dairy product manufacturing Household 325620 Toilet preparation manufacturing products Food 311520 Ice cream and frozen dessert manufacturing Household 335912 Primary battery manufacturing Food 311611 Animal (except poultry) slaughtering products Food 311612 Meat processed from carcasses Food 311615 Poultry processing Source: PwC. 2012 Financial Performance Report86 Profitable Growth: Driving the Demand Chain
  • 91. Appendix A: Financial performance metrics methodologyCompany choice RetailersThe companies analyzed in the Financial Performance A group of core NAICS codes that represent GMA retail activitiesMetrics section were identified as companies that operate were identified and used to generate a list of retail companies forin the CPG manufacturing or retail industries. This inclusion in the analysis.designation is generally based on a company’s primary Exhibit 39 lists the retailer NAICS codes and NAICS code descrip-industry, identified using the North American Industry tions used in the Financial Performance Metrics section of thisClassification System (NAICS) as designated by each report.company and reported in Reuters. Exhibit 39Manufacturers Primary retailer NAICS codesA core group of NAICS codes was used to categorize NAICScompanies according to CPG industries, including food, code NAICS descriptionbeverage, and household products manufacturing activi- 424410 General line grocery wholesalersties. After reviewing this list, we excluded a handful of Supermarkets and other grocerycompanies, either because they predominantly do business 445110 (except convenience) storesoutside the United States or because their primary activi- 445120 Convenience storesties did not align with the CPG sector. Additional food, bev-erage, and household products companies were included 445299 All other specialty food storesin the analysis based on the nature of their products, given 452110 Department stores (excluding leased departments)diverse manufacturing activities. 454110 Electronic shopping and mail-order housesExhibit 38 lists the manufacturer NAICS codes and NAICS 446110 Pharmacies and drug storescode descriptions by sector used in the Financial Perfor-mance Metrics section of this report. 446120 Cosmetics, beauty supplies, and perfume stores 446191 Food (health) supplement stores 447110 Gasoline stations with convenience stores 452910 Warehouse clubs and superstores 452990 All other general merchandise stores 453910 Pet and pet supplies stores Source: PwC.87 Appendix A
  • 92. Appendix A: Financial performance metrics methodologyData preparation and metric Exhibit 40construction Size segmentations for financial reporting metricsThe following data preparation steps were necessary Very large manufacturers net sales > $10Bbefore calculating financial metrics. Large manufacturers net sales > $4BCurrency exchange rates were applied to financial data Medium manufacturers $500M < net sales < = $4Bfields denominated in non-US currencies. Conversionswere computed based on the annual averaged exchange Small manufacturers $50M < net sales < = $500Mrate for each fiscal year operating period. Source: PwC.Companies that changed their reported fiscal year startingand ending dates for at least one of the reporting periods Companies with net sales of less than $50 million for theresulted in duplicate data across fiscal years. The duplicate most recent reported fiscal year were excluded.fiscal year observation was removed by annualizing thereported financials where necessary. Counts for the number of manufacturers included in each size- and industry-based segment are included inData elements associated with companies that have Exhibit 41.reporting periods markedly different from the standardlength of a calendar year (i.e., 12 months or 52 weeks)were either annualized or dropped. Exhibit 41Data used to calculate metrics presented in this report was Manufacturing companies by industry size and segmentcompared with 10-K filings for selected firms to check forinconsistencies. The quartiles were determined based on Large Small Medium (very large) Totalthe companies with reported data for each financial metric.Definitions for each metric can be found in Appendix D. Beverage 8 12 16 (11) 36 Food 19 25 30 (16) 74Data reporting Household 5 10 17 (10) 32 productsReported results utilize median figures in order to reducethe effect of performance outliers on the overall metrics. Total 32 47 63 (37) 142When the count of companies with reported data is largeenough, we also report quartile figures at the 25th and Source: PwC.75th percentile observations.In the industry benchmark, firms with more than US$10billion in net sales in their most recent reported fiscal yearare highlighted in a separate “very large” grouping, but arealso included in the “large manufacturers” results.Other size-based segmentations were defined using thebenchmarks noted in Exhibit 40. 2012 Financial Performance Report88 Profitable Growth: Driving the Demand Chain
  • 93. Appendix B: Manufacturer company listAgFeed Industries, Inc. Elizabeth Arden, Inc. Parlux Fragrances, Inc.Agria Corporation (ADR) Energizer Holdings, Inc. Peet’s Coffee & Tea, Inc.Ajinomoto Co., Inc. Exide Technologies PepsiAmericas, Inc.Alberto-Culver Company Farmer Brothers Co. PepsiCo, Inc.American Italian Pasta Company Feihe International, Inc. Physicians Formula Holdings, Inc.Anheuser-Busch Companies, Inc. Flowers Foods, Inc. Pilgrim’s Pride CorporationAnheuser-Busch InBev NV Fomento Económico Mexicano S.A.B. Pinnacle Foods Finance LLCArcher Daniels Midland Company de C.V. (ADR) Ralcorp Holdings, Inc.Associated British Foods plc Foster’s Group Limited Reckitt Benckiser Group plcAvon Products, Inc. General Mills, Incorporated Reddy Ice Holdings, Inc.B&G Foods, Inc. Golden Enterprises, Inc. Revlon, Inc.Bare Escentuals, Inc. Greatbatch Inc. SABMiller plcBASF SE (ADR) Green Mountain Coffee Roasters Inc. Sanderson Farms, Inc.Beam, Inc. Groupe Danone SA (ADR) Sara Lee CorporationBirds Eye Foods, Inc. Gruma, S.A.B. de C.V. (ADR) Seaboard CorporationBridgford Foods Corporation H.J. Heinz Company Seneca Foods CorporationBrown-Forman Corporation Heineken N.V. (ADR) Shiseido Co. Ltd. (ADR)Bunge Limited Hormel Foods Corporation Smart Balance, Inc.Bush Brothers & Company Imperial Sugar Company Smithfield Foods, Inc.Cadbury plc (ADR) Inter Parfums, Inc. Solo Cup CompanyCagle’s, Inc. Interstate Bakeries Corp. SunOpta, Inc. (USA)Campbell Soup Company Inventure Foods, Inc. Synder’s-Lance, Inc.Chiquita Brands International, Inc. J&J Snack Foods Corp. Synutra International, Inc.CHS Inc. Jamba, Inc. Tasty Baking CompanyChurch & Dwight Co., Inc. Jarden Corporation Tate & Lyle PLC (ADR)Coca-Cola Bottling Co. Consolidated John B. Sanfilippo & Son, Inc. The Boston Beer Company, Inc.Coca-Cola Enterprises Inc. Johnson & Johnson The Clorox CompanyCoca-Cola FEMSA, S.A.B. de C.V. (ADR) Kellogg Company The Coca-Cola CompanyCoca-Cola HBC S.A. (ADR) Kerry Group plc The Estée Lauder Companies Inc.Coffee Holding Co., Inc. Kimberly-Clark Corporation The Hain Celestial Group, Inc.Colgate-Palmolive Company Kirin Holdings Company, Limited (ADR) The Hershey CompanyConAgra Foods, Inc. Kraft Foods Inc. The J.M. Smucker CompanyConstellation Brands, Inc. Lancaster Colony Corp. The Pepsi Bottling Group, Inc.Corn Products International, Inc. Land O’Lakes, Inc. The Procter & Gamble CompanyCott Corporation (USA) Lifeway Foods, Inc. Tootsie Roll Industries, Inc.Craft Brew Alliance, Inc. L’Oreal TreeHouse Foods Inc.Crystal Rock Holdings, Inc. Marine Harvest ASA Tyson Foods, Inc.Cuisine Solutions, Inc. McCormick & Company, Inc. Ultralife CorporationDakota Growers Pasta Co., Inc. Mead Johnson Nutrition Co. Unilever PLC (ADR)Darling International Inc. Medifast, Inc. Vina Concha y Toro S.A. (ADR)Dean Foods Company Merisant Company Wm. Wrigley Jr. CompanyDel Monte Foods Company MGP Ingredients, Inc. WyethDel Monte Pacific Limited Molson Coors Brewing Company Zep Inc.Diageo plc (ADR) Monster Beverage CorporationDiamond Foods, Inc. Monterey Gourmet Foods, Inc.Diedrich Coffee, Inc. National Beverage Corp.Dole Food Company, Inc. Nestlé SADr Pepper Snapple Group Inc. Novartis AG (ADR)DSG International (Thailand) PCL Overhill Farms, Inc.Ecolab Inc. Owens-Illinois, Inc.89 Appendix B
  • 94. Appendix C: Retailer company list99¢ Only Stores Tesco PLC (ADR)Alimentation Couche-Tard Inc. The Great Atlantic & Pacific Tea CompanyAlimentation Couche-Tard Inc. (USA) The Jean Coutu Group (PJC) Inc.Amazon.com, Inc. The Kroger Co.Arden Group, Inc. The Pantry, Inc.Big Lots, Inc. The Penn Traffic CompanyBJ’s Wholesale Club, Inc. TravelCenters of America LLCCargills (Ceylon) PLC Ulta Salon, Cosmetics & Fragrance, Inc.Casey’s General Stores, Inc. Village Super Market, Inc.Cost Plus, Inc. Vitacost.com, Inc.Costco Wholesale Corporation Vitamin Shoppe, Inc.CVS Caremark Corporation Walgreen CompanyDairy Farm International Holdings Limited Wal-Mart de Mexico, S.A.B. de C.V. (ADR)Delhaize Group (ADR) Wal-Mart Stores, Inc.Distribucion y Servicio D&S S.A. (ADR) Weis Markets, Inc.Dollar General Corp. Whole Foods Market, Inc.Dollar Tree, Inc. Winn-Dixie Stores, Inc.drugstore.com, inc.Duane Reade Holdings, Inc.Duckwall-ALCO Stores, IncEmpire Company LimitedFamily Dollar Stores, Inc.Fred’s, Inc.Harry & David Holdings, Inc.Ingles Markets, IncorporatedJ Sainsbury plc (ADR)Koninklijke Ahold N.V. (ADR)Loblaw Companies LimitedLongs Drug Stores Corp.Magnit OAOMedco Health Solutions Inc.Metro, Inc.Nash-Finch CompanyOmnicare, Inc.Perfumania Holdings, Inc.PetSmart, Inc.PharMerica CorporationPriceSmart, Inc.Publix Super Markets Inc.Rite Aid CorporationRuddick CorporationSafeway Inc.Sally Beauty Holdings, Inc.Sears Holdings CorporationShoppers Drug Mart CorporationSpartan Stores, Inc.Stater Bros. Holdings Inc.SUPERVALU INC.Susser Holdings CorporationTarget Corporation 2012 Financial Performance Report90 Profitable Growth: Driving the Demand Chain
  • 95. Appendix D: DefinitionsBeverage manufacturers EBITManufacturers of beverage products, including breweries, Earnings from continuing operations, before interest and taxes.distilleries, and wine producers. EBITDABook capital Earnings before interest, taxes, depreciation, and amortization.The sum of total debt and the book value of equity. Economic profitCash conversion cycle Economic profit spread is calculated by taking return on investedSum of days sales outstanding and days inventory outstanding capital (ROIC) and subtracting the weighted average cost ofminus days payable outstanding for the same fiscal year. capital (WACC).Cost of goods sold Effective tax rateThe total cost of the inputs to producing products, including Income tax divided by earnings before tax for the sameexcise tax payments. fiscal year.CPG manufacturers (referred to in this report as Food manufacturers“manufacturers”) Manufacturers of food products, including dry coffee and teaCompanies that manufacture food, beverage, and household and producers; frozen fruit, juice, and vegetable producers; and dry,personal care products. condensed, and evaporated dairy product manufacturers.CPG retailers (referred to in this report as “retailers”) Free cash flow as a percentage of salesCompanies that sell manufactured food, beverage, and One-year, three-year, or five-year cumulative cash from operatinghousehold and personal care products. activities, less capital expenditures plus cash interest paid as a percent of cumulative net sales, for the same time period.Current ratioCurrent assets for a reported fiscal year divided by the current Global companiesliabilities for that same year. Companies with greater than or equal to 20% of their revenues coming from outside the United States.Days sales outstandingThe average of the previous fiscal year’s and reported fiscal year’s Gross marginaccounts receivable divided by the reported fiscal year’s average Ratio of net sales minus cost of goods sold to net sales, for thedaily net sales. same fiscal year.Debt-to-equity ratio Household products manufacturersTotal debt for a reported fiscal year divided by the total book Manufacturers of household and personal care products, includ-equity for that same year. ing primary battery producers and dog and cat food producers.Domestic companies Interest coverage ratioCompanies with less than 20% of their revenues coming from out- EBIT for a reported fiscal year divided by interest expense on debtside the United States. for that same year.91 Appendix D
  • 96. Appendix D: Definitions Inventory turnover Return on sales Cost of goods sold for a reported fiscal year divided by the EBIT for a reported fiscal year divided by net sales for average of the previous fiscal year’s and reported fiscal year’s that same year. total inventory. Sales per employee IRR Net sales for a given year divided by the average of the previous Internal rate of return, used in capital budgeting to measure the year’s and reported fiscal year’s total number of employees. profitability of investments. Selling, general, and administrative (SG&A) expense Large companies as a percentage of sales Companies with greater than $4 billion in net sales in their last Ratio of selling, general, and administrative expense to net sales, reported fiscal year. for the same fiscal year. Market capital Shareholder return Sum of total debt and total market value of equity. Annualized percentage return from stock prices and reinvested dividends for a fiscal year-end. Medium companies Companies with greater than $500 million and less than or equal Short-term to long-term debt ratio to $4 billion in net sales in their last reported fiscal year. Short-term debt for a reported fiscal year divided by long-term debt for that same year. Net sales Net revenue as reported by a company. Small companies Companies with greater than $50 million and less than or equal Operating cash flow ratio to $500 million in net sales in their last reported fiscal year. Cash flow from operations divided by current liabilities. Total debt Return on average assets Total debt outstanding, including notes payable/short-term debt, EBIT for a reported fiscal year divided by the average of the current portion of long-term debt/capital leases, and total long- previous fiscal year’s and reported fiscal year’s total assets. term debt. Return on invested capital Very large companies Net operating profit after taxes for a reported fiscal year divided Companies with greater than $10 billion in net sales in their last by the average of the previous fiscal year’s and reported fiscal reported fiscal year. year’s book capital. Return on market capital EBITDA for a reported fiscal year, divided by the average of the previous fiscal year’s and reported fiscal year’s market capital. 2012 Financial Performance Report92 Profitable Growth: Driving the Demand Chain
  • 97. Endnotes 6. Based on household spending patterns from the 1992 Unless noted otherwise, quotes from the following Consumer Expenditure Survey from the Bureau of Labor business leaders were sourced from interviews Statistics (accessed March 2012). conducted by PwC on the following dates: 7. Data on imports and exports by country and industry from • Bert Alfonso, CFO, The Hershey Company (March International Trade Administration TradeStats Express (accessed March 2012). 30, 2012) 8. Total grocery spending between 2005 and 2011 from US • Chris Davies, CFO, Diageo’s North American Census Bureau, “Monthly Retail Trade and Food Services” Operating Unit (May 2, 2012) (March 2012). • John Gehring, CFO, ConAgra Foods (April 5, 2012) 9. Projection from European Commission, Directorate for Economic and Financial Affairs, Interim Forecast (February • Don Mulligan, CFO, General Mills, Inc. (March 28, 2012). 2012) 10. OECD presentation, “What Is the Economic Outlook for • Steve Robb, CFO, The Clorox Company (April 25, OECD Countries?” (November 28, 2011). 2012) 11. ISI Emerging Markets (March 2012). • Bill Schumacher, CFO, Sunny Delight Beverages 12. “A Crude Hit to the Economy,” National Journal (November Company (April 4, 2012) 29, 2011). Estimated relationship between oil price and employment from IHS Global Insight. • Duane Still, CFO, The Coca-Cola Company’s CCR 13. PwC, Economic Impact of the U.S. Grocery Manufacturing Operating Unit (April 10, 2012) Industry (October 26, 2011), prepared for the Grocery • Al Williams, CFO, Bush Brothers (March 29, 2012) Manufacturers Association. 14. The Clorox Company website. 15. PwC, Global Entertainment and Media Outlook: 2012–2016 1. Andrew Feller, Dr. Dan Shunk, and Dr. Tom Callarman, (2012). “Value Chains Versus Supply Chains,” BP Trends (March 2006); www.ceibs.edu/knowledge/papers/ 16. PwC, 15th Annual Global CEO Survey (2012). images/20060317/2847.pdf. 17. Ibid. 2. Shipments are measured in nominal terms (i.e., prices are 18. American Express, 2011 Global Customer Service Barometer not adjusted for inflation), so they are best compared with (2011). nominal consumption. Growth rate in nominal consumption 19. Anthony Van der Hoek, quoted in PwC, Engage Customers (seasonally adjusted) based on Bureau of Economic Through Social Media: Digital Transformation (2011). Analysis, National Income and Product Accounts Table 1.1.5 (accessed March 2012). 20. Byron Banks, “Why Consumer Packaged Goods Companies Love Big Data,” Forbes (March 27, 2012). 3. Patrick Canning, Food Dollar Series: A Better Understanding of Our Food Costs, US Department of Agriculture Economic 21. Ibid. Research Service, Economic Research Report 114 (February 22. comScore, It’s a Social World: Top 10 Need-to-Knows About 2011); www.ers.usda.gov/Publications/ERR114/ERR114. Social Networking and Where It’s Headed, referenced in PwC, pdf. “10Minutes on Customer Impact” (2012). 4. Energy Information Administration, “US Gasoline and 23. PwC, 4th Annual Digital IQ Survey, referenced in PwC, Diesel Retail Prices”(March 2012). “10Minutes on Customer Impact” (2012). 5. Growth in per capita disposable personal income between 24. Corporate Executive Board, Overcoming the Insight January 2010 and December 2011, as reported by the Deficit: Big Judgment in an Era of Big Data, quoted in PwC, Bureau of Economic Analysis (March 2012). “10Minutes on Customer Impact” (2012).93 Endnotes
  • 98. Endnotes25. David Zax, “Foresight Is 20/20: Predictive Analytics and the 43. For more information, see PwC, Customers Take Control Business of Certainty,” FastCompany (September 29, 2011). (multichannel survey) (December 2011).26. Southwest Airline Co., company financials. 44. Economist Intelligence Unit, New Directions: Consumer Goods Companies Hone a Cross-Channel Approach to27. PRTM, Annual Supply Chain Trends Report: Using the Supply Consumer Marketing (January 2012). Chain to Drive Operational Innovation (2007). 45. PwC, Customers Take Control (December 2011).28. 1992 GMA Executive Conference: Study identified 104 days of dry goods inventory in the CPG supply chain. 46. PwC, Experience Radar 2011: Insights for the US Retail Industry (November 2011).29. Philip Butta, “The World’s 50 Most Innovative Companies in 2012,” FastCompany (March 2012); Hansi Lo Wang, 47. Economist Intelligence Unit, New Directions: Consumer “Greek Yogurt Sales Rise in U.S. Dairy Aisles,” NPR (August Goods Companies Hone a Cross-Channel Approach to 22, 2011). Consumer Marketing (January 2012).30. Mike Esterl, “The Beverage Wars Move to Coconuts,” The 48. “How Brands Should Think about Facebook: A Loyalty Wall Street Journal (February 11, 2012). Program,” Advertising Age (September 1, 2011).31. US Census Bureau, Income, Poverty, and Health Insurance 49. “Unilever Launches App to Record Nights Out,” Worldwide Coverage Report (2009); www.census.gov/prod/2010pubs/ Computer Products News (May 6, 2011). p60-238.pdf. 50. Kunur Patel, “Your Digital Questions Answered; Daily32. “The Bottom of the Pyramid,” The Economist (June 23, Deals,” Advertising Age (February 27, 2012). 2011). 51. Nielsenwire, “Five Things to Know about Online33. Lauren Weber, “McCormick Spices Up Its Product Line for Grocery Shopping” (May 31, 2011); http:// Home Cooks,” The Wall Street Journal (January 3, 2012). blog.nielsen.com/nielsenwire/consumer/ five-things-to-know-about-online-grocery-shopping.34. Ellen Byron, “Mr. Clean Takes Car-Wash Gig,” The Wall Street Journal (February 5, 2009). 52. Andrew Adam Newman, “Ketchup Moves Upmarket, with a Balsamic Tinge,” The New York Times (October 25, 2011).35. Ray A. Smith, “The New Dirt on Dry Cleaners: Why Vinaigrette Is Tricky, Buttons Fall Off and Other Mysteries 53. John Melloy, “Heinz Facebook Gaffe: ‘Where’s My Balsamic Behind the Counter,” The Wall Street Journal (July 28, Ketchup?’” CNBC.com (November 14, 2011). 2011). 54. Ashley Lutz, “Gamestop to J. C. Penney Shut Facebook36. “Gatorade’s New Selling Point: We’re Necessary Stores,” Bloomberg News (February 22, 2012). Performance Gear,” Advertising Age (January 1, 2012). 55. comScore, Next Generation Strategies for Advertising37. Rae Ann Fera, “General Mills Wants Your Ideas for Its Next to Millennials (January 2012), www.comscore.com/ Cereal Game and Cake App,” FastCompany (December 8, Press_Events/Presentations_Whitepapers/2012/Next_ 2011). Generation_Strategies_for_Advertising_to_Millennials; “Gen Y Difficult to Reach, Respond to People, not Brands,”38. See, for example, Vijay Govindarajan, “Five Phases Toward digitalcpg.com (April 2, 2012). ‘Reverse Innovation,’” The Wall Street Journal (December 4, 2011); “Less Is More,” The Economist (November 17, 2011). 56. “General Mills Pilots Hispanic Online Sampling Program,” Progressive Grocer (January 4, 2012).39. Chuck Salter, “Marissa Mayer’s 9 Principles of Innovation,” FastCompany (February 20, 20008). 57. PwC, Customers Take Control (December 2011).40. Ibid. 58. PwC, Technology Forecast (2012, Issue 1).41. Todd Wasserman, “Orabrush Parlays YouTube Success into 59. www.mymms.com/utility.aspx?oid=65. Walmart Deal” (September 20, 2011); http://mashable. 60. Michael E. Porter and Mark L. Kramer, “Creating Shared com/2011/09/20/orabrush-walmar/. Value: How to Reinvent Capitalism—and Unleash a Wave of42. Ronan Shields, “Unilever Plans for Mobile Marketing Innovation and Growth,” Harvard Business Review (January- Primacy by 2020,” New Media Age (June 23, 2011). February 2011). 2012 Financial Performance Report94 Profitable Growth: Driving the Demand Chain
  • 99. Endnotes61. National Institutes of Health, http://ghr.nlm.nih.gov/ 81. Brad Jakeman, quoted in “Pepsi Tackles Identity Crisis,” condition/celiac-disease; Paul Demery, “General Mills Advertising Age (May 6, 2012). Bakes Up a New E-commerce Strategy,” Internet Retailer 82. Ibid. (August 16, 2011), www.internetretailer.com; General Mills press release, “GlutenFreely.com Serves as One-Stop Shop 83. PwC, 15th Annual Global CEO Survey, Sector Summary for Gluten-Free Community (May 12, 2011). (2012).62. Keith O’Brien, “Should We All Go Gluten-Free?” The New 84. “How to Build an Effective Demand Planning Organization,” York Times (November 25, 2011). Gartner (May 10, 2012).63. Ibid. 85. Harry Broadman, “Navigating the Risks and Opportunities in Emerging Markets,” PwC View (2012).64. Microsoft case studies, “General Mills Uses Cloud Solution to Create New Consumer Business Channel” (July 11, 2011).65. C. Barry, R. Markey, E. Almquist, and C. Brahm, Putting Social Media to Work, Bain & Company (2011).66. Fair Trade USA press release, “Sales of Fair Trade Products Up by 75% in 2011” (March 6, 2012); http://fairtradeusa.org/terms-of-use.67. R. Baker, “Unilever: ‘Marketing Needs to Be Noble Again,’” Marketing Week (February 7, 2012).68. R. Baker, “Unilever Sets Up Customer-Insight Panel to Weather ‘Difficult’ 2012,” New Media Age (February 3, 2012).69. Ibid.70. “PepsiCo Brings Marketing Prowess to Bear on Two Fronts,” Supplier News (April 25, 2011).71. “Walmart Announces Significant Progress Toward Ambitious Sustainability Goals in 2012 Global Responsibility Report,” PR Newswire (U.S.) (April 16, 2012).72. Carbon Disclosure Project 2011 S&P 500 Report (2011).73. “Emerging Market Cities,” The Economist (April 24, 2012).74. Ibid.75. Harry Broadman, “Navigating the Risks and Opportunities in Emerging Markets,” PwC (2012).76. “Mall of the Masses,” The Economist (April 14, 2012).77. Sanjay Khosla, Kraft President of Developing Markets, quoted in Bruce Einhorn, “There’s More to Oreo than Black and White,” Bloomberg Businessweek (May 3, 2012).78. Candice Choi, “‘Crab’ Chips, Fruity Oreos? They’re Big Overseas,” Associated Press (May 6, 2012).79. “Feeding Little Emperors,” The Economist (April 28, 2012).80. Ibid.95 Endnotes
  • 100. AcknowledgementsWe would like to thank a number of people for their contribu- Analysis and researchtions and for providing their input. Through their collabora-tive efforts, the core team members have been instrumental in Core teamthe success and completion of the 2012 Financial Performance Tamara BereskyReport. We would also like to acknowledge the contributions Kate Glennmade by our subject-matter specialists, knowledge managers Christine Hoyteand researchers, and administrative personnel, and thank them Peter Hurleyfor their ongoing level of commitment. More than 50 people Kristin Krogstiewere involved in creating this report. A project of this magnitude Anbu Manirequired passion and dedication from all involved. Rich Miskewicz Jonathan Sackstein Rob SheltonSubject-matter specialists Patrick YostEconomic recovery remains vulnerable on all fronts Financial performance development and analysisJohn Stell Joseph BedenbaughCatching up to consumers in the age of demand Sanaa KholfiAnbu Mani Eduardas ValaitisPatrick YostAre your demand and supply chains in synch? EditorialRich Miskewicz EditorialPlay-to-win innovations: Disrupting the demand chain Mike BrewsterRob Shelton John CampbellGetting smarter about digital engagement Elizabeth CollinsGaitri Chandra Raj Lauren Keller JohnsonBob Moncrieff Janice KochRick Whitney Design and productionIs the time right to invest in a direct-to-consumer channel? PwC Graphic DesignSeth Fink Matt HannafinJaelyn Kwan Kerry TiceStirring up sustainability demand Other contributorsJoanie Baczewski PwC R&A Business ResearchClinton MoloneyAdam SavitzCapitalizing on emerging market growth opportunitiesCaroline BeairdSeth FinkBryan KristyBefore expanding abroad, dig deeper into thetax implicationsDouglas L. McHoneyMatthew Wallace 2012 Financial Performance Report96 Profitable Growth: Driving the Demand Chain
  • 101. 2012 Financial Performance Report Profitable Growth: Driving the Demand Chain GMA and PwC professionals are available to discuss the data, analysis, and commentary in this report, and to help you address the opportuni- ties discussed within. For further information, please contact: Jennifer Kaleda Lisa Feigen Dugal Vice President, Industry Affairs North American Advisory Leader, Grocery Manufacturers Association Retail & Consumer Industry 202 295 3947 PwC jkaleda@gmaonline.org 646 471 6916 lisa.feigen.dugal@us.pwc.com John G. Maxwell Global Leader, Retail & Jonathan Sackstein Consumer Industry New York Metro Assurance Leader, PwC Retail & Consumer Industry 646 471 3728 PwC john.g.maxwell@us.pwc.com 646 471 2460 jonathan.s.sackstein@us.pwc.com Susan McPartlin US Leader, Retail & Consumer Industry PwC 513 361 8094 susan.m.mcpartlin@us.pwc.com97
  • 102. Grocery Manufacturers Association2012 Financial Performance ReportProfitable Growth: Driving the Demand Chain